House Democrats blast housing regulator for stance on reducing mortgage principal

Two House Democrats blasted a federal housing regulator on Wednesday for what they argue is his inconsistent stance on whether reducing mortgage principal for some homeowners would cost or save taxpayers money. 

Rep. Elijah Cummings, ranking member of the House Oversight and Government Reform Committee, along with panel member Rep. John Tierney (D-Mass.) sent a letter on Wednesday to Edward DeMarco, acting director of the Federal Housing Finance Agency (FHFA), expressing concern over his recent response to Congress that principal reduction programs for loans held by Fannie Mae and Freddie Mac are a costly way to help homeowners who owe more than their homes are worth. 

"The single most significant revelation in your letter to Congress, is that, even based on your own questionable assumptions and data, principal reduction programs serve the taxpayer interests even when compared to your preferred alternative of forbearance," Cummings and Tierney wrote in response to DeMarco's Jan. 20 letter to House Democrats on the panel. 

This statement contradicts DeMarco’s Nov. 16 testimony before the panel, when he said principal reduction “is not going to be the least-cost approach for the taxpayer."

The lawmakers criticized DeMarco for highlighting a $100 billion cost for providing principal reductions for 3 million homeowners underwater on their mortgages instead of a $28 billion savings for reducing principal for even a small subset of those homeowners, according to information in reports provided to the lawmakers by the FHFA. 

"A more relevant figure would have been an estimate of the costs of taking no action at all and allowing all three million underwater mortgages to default — an amount that vastly exceeds your $100 billion estimate," they wrote.

Housing Department Secretary Shaun Donovan said recently that reducing principal mortgages is considered by economists to be one of the best ways to help the housing market recover. President Obama has proposed a broader program that also would help homeowners who don't have government-backed mortgages, expanding the pool of eligibility. 

The lawmakers suggested that DeMarco make greater efforts to help the housing market and, in turn, the broader economy, or "step aside."

For the past several months, Democrats have called for DeMarco to step down and have urged the White House to appoint a director that is more friendly to their policy ideas. 

"We understand that the Federal Housing Finance Agency (FHFA) is not part of the Obama administration, and that you do not take direction from administration officials, but it appears that your refusal to follow Congress’ direction and allow principal reduction programs is based more on ideology and the fear of political backlash than on a straightforward analysis of the interests of American taxpayers," they wrote. 

Cummings and Tierney also said a former Fannie Mae employee has provided new information about a pilot program for principal reductions tentatively approved in 2010 but canceled by Fannie Mae officials because they were “philosophically opposed” to the concept of reducing principal, despite potential economic benefits

“We have now become aware of new information, that calls into serious question the accuracy and completeness of your response, as well as your motivation for continuing to oppose principal reduction programs even when they have the potential to save American taxpayers billions of dollars," the lawmakers wrote.

DeMarco’s letter to Congress did not mention the pilot program, and instead repeated his argument that he lacks the statutory authority to proceed with principal reduction programs, they said.

"If these allegations by the former employee are accurate, your response to Congress is seriously deficient and misleading."