Federal housing regulator postpones decision on principal reductions

House Democrats have kept the heat on DeMarco to consider reductions of mortgage principal to help borrowers and, inevitably, shore up the battered housing market. 

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

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. 

But he did signal a willingness to consider the policy based on further review, which is still under way. 

“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.

During a recent speech at the Brookings Institution, DeMarco said the FHFA's recent reexamination of reducing mortgage principal for underwater borrowers could save upward of $1.7 billion under a plan put forward by the Treasury Department as part of HAMP.

He argued that even if the agency chooses to move forward, reducing principal would affect fewer than 1 million homeowners, a fraction of the estimated 11 million who are underwater on their loans nationwide. 

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. 

Still, DeMarco has remained skeptical while banking industry groups have voiced concern that offering the reductions would start a slew of intentional defaults by homeowners who want to get into the government principal reduction program. 

Concern among lawmakers has been escalating over the possibility that DeMarco would start allowing borrowers to reduce mortgage principal, thus creating an opening for homeowners to walk away from their loans and further weighing on the housing market's recovery. 

“Principal reductions create an incentive for a huge group of borrowers who have continued making their payments, despite lower home prices, to stop paying in hopes of principal forgiveness," said Frank Keating, president and chief executive, American Bankers Association. 

On the other hand, Congressional Democrats and the Obama administration are arguing that principal reduction will save taxpayers money by reducing the chance that homeowners who are deeply under water will eventually give up on their mortgages. 

Moreover, they say, the move could help borrowers keep their homes and slow the rate of foreclosures, which have flooded the market and sent home prices plunging.