Cummings: Regulator wasting taxpayer money by refusing principal forgiveness

The country's top housing regulator is frittering away taxpayer dollars by refusing to reduce mortgage principal for struggling homeowners, Rep. Elijah Cummings (D-Md.) charged Wednesday.

Edward DeMarco, head of the Federal Housing Finance Agency (FHFA), has declined to write down the principal for loans backed by Fannie Mae and Freddie Mac, arguing that other anti-foreclosure strategies create bigger returns for the bailed-out mortgage giants.

Cummings, the senior Democrat on the House Oversight and Government Reform Committee, said principal forgiveness "saves more money than any other type of modification," and suggested DeMarco is shirking his duties by taking that option off the table.

DeMarco, Cummings said, "has a duty and an obligation to allow the use of principal reduction" but has so far "refused to allow Fannie Mae and Freddie Mac to offer principle reduction even in cases in which it would save money compared to foreclosure or to other types of modifications." 

"That's Mr. DeMarco's mandate," Cummings said during a housing summit in Washington sponsored by the National Association of Real Estate Brokers. "That is what Congress directed him to do. If principal reduction will save the taxpayers money, he should be doing it now."

Cummings' comments are the latest salvo in the months-long fight between House Democrats and DeMarco over how FHFA can best stabilize the rickety housing market and bolster the finances of Freddie and Fannie. The lawmakers have previously asked DeMarco to resign if he won't use principal forgiveness.

On Tuesday, Cummings and Rep. John Tierney (D-Mass.) sent DeMarco a letter charging that the FHFA has withheld documents revealing the benefits of principal reductions for the taxpayers who have propped up Fannie and Freddie.

The lawmakers referenced internal documents from Fannie Mae revealing that leaders of the mortgage-finance giant believe principal forgiveness, in Cummings' words, "has enormous potential to save the United States taxpayers significant amounts of money by avoiding losses that result from foreclosures."

DeMarco fired back the same day, chiding the Democrats for releasing confidential material.

"I wish to convey my disappointment with this letter, the failure to contact FHFA to address your concerns, and the release of selective elements of the proprietary and confidential materials you received," DeMarco wrote in a letter to Cummings and Tierney. "I strongly disagree with any characterization of FHFA’s work or motives as anything but in keeping with the professionalism expected of this agency."

DeMarco's dual mandate puts him in a tricky spot. On one hand, he's charged with stabilizing the housing market; on the other, he's supposed to maximize returns for Fannie and Freddie in order to pay back the taxpayers who bailed out those entities to the tune of roughly $160 billion beginning in 2008.

DeMarco says his own analysis at FHFA indicates that different steps — namely reducing interest rates, extending the duration of loans and offering principal forbearance arrangements to struggling homeowners — provide a better balance between those mandates than principal forgiveness does.

But the Democrats reject that argument, noting that even private lenders are using principal reduction in some cases to maximize profits.

"All of the major banks do some form of principal reduction for mortgages that they own," Cummings said Wednesday. "Unfortunately, a significant portion of homeowners do not have access to this form of aid because their mortgages are owned by Fannie Mae and Freddie Mac."

Democrats found another ally on Tuesday when James Lockhart, former FHFA director under President George W. Bush, said Fannie and Freddie should at least experiment with principal write-downs.

"There should be some experimentation, you need to look at various alternatives," Lockhart said during an economic summit put on by Bloomberg Washington. "Foreclosure is not the answer. … We're destroying neighborhoods with foreclosures.

“If there is principal forgiveness, there should be some sort of shared appreciation to go with it, or every time you make a payment you give a little of your principal forgiveness," Lockhart added. “I don’t think a massive program, at this point, because we don’t know enough, but we should looking at the alternatives."

Shaun Donovan, secretary of Housing and Urban Development, has also urged FHFA to use principal forgiveness to prevent foreclosures. Appearing at the Bloomberg forum, Donovan said the administration is making strides under its own mortgage forgiveness initiative, the Home Affordable Modification Program (HAMP), which provides financial incentives to lenders who reduce principal to prevent foreclosures.

The administration recently hiked the incentive payments to encourage more modifications while extending the life of the program through 2013. Donovan said Tuesday that he's "very open" to extending it even further.

"We extended it to December 2013 because we thought that was long enough at this point, [but] we are certainly open, depending on where the housing market is at that point, to considering that again," Donovan said.

"We don't think that's an immediate question because we just extended it an additional year, but it's something that we'd be open to."

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