Housing chief says reducing mortgage principal could save Fannie, Freddie money

House Democrats are pressuring DeMarco’s agency, which oversees the mortgage giants Fannie Mae and Freddie Mac, to consider reductions of mortgage principal to help bolster the housing market and boost the economic recovery. 

Maryland Democrat Rep. Elijah Cummings, ranking member of the House Oversight and Government Reform Committee, and panel member Rep. John Tierney (D-Mass.) have called on DeMarco to provide more information about his refusal to reduce mortgage principal.

“I have been saying for many months that we need to focus on data rather than ideological or political opposition to principal reductions,” Cummings said in a Tuesday statement. 

“Although I am encouraged that Mr. DeMarco has now begun to move in this direction, we continue to await the documents and analyses we requested months ago, and the jury is still out on whether he will act to serve both homeowner and taxpayer best interests.”

The White House, along with some lawmakers and housing advocates, has repeatedly tried to persuade DeMarco to allow Fannie and Freddie to write down loans to help out homeowners who owe far more than their homes are worth.

The Treasury Department has proposed an expansion of the incentives for reducing mortgage principal that are now offered under the Home Affordable Modification Program (HAMP). 

The FHFA estimates of the Treasury plan show that about 691,000 eligible homeowners would receive, on average, about $51,000 in loan forgiveness. Using a principal reduction program would save $9.9 billion, compared with $8.2 billion under the current version of HAMP. 

The costs to taxpayers of Treasury's incentives programs would be about $3.8 billion, according to the FHFA analysis. 

"Whether Fannie Mae or Freddie Mac forgive principal or not, the universe of enterprise borrowers potentially eligible is well less than 1 million households, a fraction of the estimated 11 million underwater borrowers in the country today," DeMarco said.

"This is not about some huge difference-making program that will rescue the housing market," he said. 

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He said the debate is centered on what tools are best at maximizing assistance to several hundred thousand homeowners while minimizing further cost to all other homeowners and taxpayers, which has been the concern frequently expressed by DeMarco during his trips up to Capitol Hill.

Overall, the benefit of principal forgiveness is that by reducing foreclosures relative to other modification types, Fannie's and Freddie's losses would be lowered and housing prices would stabilize faster, "thereby producing broader benefits to all market participants," he said.

He reiterated, though, that the new batch of data isn't enough to convince him to move forward on principal reductions because there are other risks and possible program expenses that haven't been properly factored into the overall cost, such as new technology, training personnel and other costs. 

“We are still evaluating the direct operational costs, but they are not trivial,” he said.

DeMarco emphasized that the larger group of underwater borrowers who are paying their mortgages "are the much greater contingent risk to housing markets and to taxpayers."

“A key risk in principal forgiveness targeted at delinquent borrowers is the incentive created for some portion of the current borrower population to cease paying in search of a principal forgiveness modification,” he said.

Fannie and Freddie have made significant progress on making loan modifications through other programs. 

"FHFA staff has sought to develop and improve on loan modification and loan refinance programs that bring meaningful options to struggling borrowers who want to stay in their homes," he said. 

DeMarco has said he expects to complete the analysis this month. 

— This story was updated at 4:31 p.m.

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