Donovan urges DeMarco to reconsider decision on principal reduction

By Vicki Needham - 08/02/12 01:45 PM ET

Housing Secretary Shaun Donovan is calling on the nation's top housing regulator to reconsider his decision not to let homeowners write down the principal on their government-backed mortgages.

"We believe and the president believes that the decision Edward DeMarco made is wrong and we're urging him to reconsider," Donovan said Thursday.

"There is clear evidence, at this point, that principal reductions benefit homeowners and neighborhoods and benefit the taxpayer and the economy more broadly," he told reporters during a conference call.

Edward DeMarco, the acting director of the federal agency that oversees Fannie Mae and Freddie Mac, announced Tuesday that an analysis showed that reducing principal balances is too risky and could cost taxpayers more money.

"We certainly hope that DeMarco will reconsider," Donovan said.

In his Tuesday statement, DeMarco said the Federal Housing Finance Agency (FHFA), "concluded the potential benefit was too small and uncertain relative to unknown costs and risks."

The decision earned immediate rebukes from congressional Democrats and Treasury Secretary Timothy Geithner who argued that the failing to consider principal reductions is not the "best decision for the country" because reducing mortgage principal would help some homeowners, bolster the housing market and save taxpayers money.

Iowa Attorney General Tom Miller, who headed up the $25 billion housing settlement with the nation's largest banks, said he also "believes so strongly that DeMarco is wrong" and that he has seen and is seeing, within the agreement that principal reductions are being used and the "world hasn't fallen apart."

"Hopefully he will watch what happens and the obvious will become clear to him," Miller said.

Miller and Donovan were promoting on Thursday their plan to provide additional information for homeowners who could take advantage of the settlement but haven't yet. The Housing and Urban Development Department is adding a page to their website and there will be a national public service announcement about how to take advantage of the settlement.

Donovan said they are reaching out to homeowners in just about every way they can whether it be by mail or radio advertising.

Meanwhile, Senate Banking Committee Chairman fired off a letter to DeMarco late Tuesday, criticizing him for releasing the latest report to the media before he received a copy and asking him to rerun the data based on questions raised in Treasury's letter.

"It is important that we look at all the relevant analyses and facts presented to make the best decisions on how to help homeowners and protect taxpayers," he wrote.

Sen. Robert Menendez (D-N.J.), chairman of Senate Banking's housing subcommittee, said DeMarco's most recent analysis failed to fix the problems from the original report earlier this year.

“This is a terrible decision and one that underscores Mr. DeMarco’s intransigence when it comes to debt forgiveness for homeowners, even as his own analysis shows the benefit to taxpayers,” he said.

Some lawmakers and housing groups have called on President Obama to fire DeMarco but the White House has little recourse.

Donovan said Obama doesn't have the authority to let him go and would be faced with choosing among two other FHFA directors without knowing their stances on principal reductions.

In 2010, Obama did nominate North Carolina Banking Commissioner Joseph Smith to lead the agency but he faced too much opposition in the Senate.

Smith was named settlement's monitor to ensure homeowners can take advantage of available funds and that banks, which face huge penalties for noncompliance, follow through with the terms of the deal.