Dems say Obama administration mulling paydowns to prevent foreclosures

The Obama administration is mulling ways to promote principal paydowns of mortgage loans to help struggling homeowners prevent foreclosures, according to House Democrats who met with a top housing regulator Wednesday.

Edward DeMarco, the acting director of the Federal Housing Finance Agency (FHFA) – the independent agency that regulates Fannie Mae and Freddie Mac – is weighing a proposal to allow bankrupt homeowners to temporarily pay down their principal balance, interest-free, in an effort to reduce negative equity, the Democrats said.

DeMarco, according to the Democrats, said the strategy “has a lot of promise” and “strikes me as being responsible.” He told the 19 Democrats with whom he met that he would weigh the proposal and get back to them within two weeks, the lawmakers said.

A spokesperson for the FHFA declined to comment on Wednesday's meeting.

The Democrats said encouraging principal paydowns would go a long way toward stabilizing the volatile housing market.

"If Mr. DeMarco actually works with us to implement this proposal, it would be an important step to address this crisis," Rep. Elijah Cummings (Md.), senior Democrat on the House Oversight and Government Reform Committee, said in a statement following the meeting.

Sponsored by Rep. Zoe Lofgren (D-Calif.), the Democrats' proposal would allow underwater homeowners who file for Chapter 13 bankruptcy to skip interest payments for five years. Instead, all of their monthly mortgage payments would go toward paying down the principal balance. In return, homeowners would agree to settle any pending claims against their mortgage servicers.

"Coordination with the bankruptcy process would make these reductions more likely to succeed than other types of loan modifications, while also limiting the program to those who truly need it," Lofgren and a long list of California Democrats wrote in an Oct. 12 letter to President Obama promoting the idea.

Many Democrats have been at odds with the administration over its housing policy for years – a conflict that gained greater attention this year after the high-profile Cummings joined the fight.

Earlier this week, the FHFA sought to improve its anti-foreclosure efforts with a number of reforms to the Home Affordable Refinance Program (HARP), a 2009 designed to help underwater homeowners obtain cheaper loans.

Though the Democrats welcomed those changes, they also contend they don't go nearly far enough to address the lingering housing crisis. Wednesday's meeting centered on those concerns.