House Democrats press for consideration of principal reductions

House Democrats are keeping the pressure on a federal housing regulator to consider reductions of mortgage principal to help borrowers, boost the housing market and save taxpayers money. 

Maryland Democrat Elijah Cummings, ranking member of the House Oversight and Government Reform Committee, and panel member John Tierney (D-Mass.) on Friday called on Edward DeMarco, acting director of the Federal Housing Finance Administration (FHFA), to provide more information about his refusal to reduce mortgage principal for homeowners underwater on their loans, despite potential new data to counter his argument. 

Fannie Mae and Freddie Mac have concluded that the policy may help homeowners stay in their homes, save the mortgage giants money, boost the ailing housing market, and reduce taxpayer risk, according to an story published by ProPublica and NPR on Friday. 

The report hasn't been made public but was recently presented to FHFA. 

"We are encouraged by reports that DeMarco may be reconsidering his opposition, but we remain concerned that he has failed to provide us all of the analyses related to his decision to prohibit principal reduction programs at Fannie and Freddie,” Cummings said.  

"He said he would submit this information by next week, so we expect it to include all of these analyses, including recent reports from Fannie and Freddie as well as information on a principal reduction pilot program that was cancelled in 2010."

The analysis could show that about 250,000 million homeowners who owe more than their homes are worth could benefit from principal reductions.

While Fannie and Freddie would incur short-term losses, the policy would save money in the long run. That is in line with what the Federal Reserve suggested in a white paper sent to Congress in January. 

"Economists agree that well-designed, targeted principal reduction programs can help both homeowners and taxpayers, and this is one reason mortgage banks already use this tool to help their own bottom lines," Tierney said.  

Reducing mortgage principal has gained momentum since the nation's top banks inked a $25 billion settlement over foreclosure abuses with federal and state governments. Reductions are expected to begin immediately under the agreement and, according to officials who negotiated the deal, they would spur a flurry of additional activity across the housing finance sector. 

In February, Cummings and Tierney wrote a letter to DeMarco saying that data he submitted to Congress in January showed that principal reduction would save taxpayers billions of dollars compared with allowing those with underwater mortgages to go into foreclosure. DeMarco has said he prefers principal forbearance because it is less risky to Fannie and Freddie, which have already received more than $150 billion in taxpayer help to stay afloat. 

These data directly contradict DeMarco’s testimony before the Oversight Committee on Nov. 16, in which he stated that principal reduction “is not going to be the least-cost approach for the taxpayer,” they said. 

In that letter, Cummings and Tierney also requested that FHFA produce all documents relating to a pilot program that was approved by Fannie Mae in 2010 to test principal reduction models that use “shared equity” approaches.

Citibank, which was supposed to be the bank leading the program, told committee staff that the FHFA has not contacted them to request the necessary documents. 

Citibank officials also indicated that they believed the pilot program was “worthwhile,” but that Fannie Mae told them it was being canceled without disclosing who made the decision.