Saying Fannie Mae and Freddie Mac have already cost taxpayers more than $188 billion, the acting chief of the Federal Housing Finance Agency, which regulates those lenders, says he has concluded that those firms won’t participate in the Obama administration’s program to cut the amount struggling homeowners owe.
Edward DeMarco, the acting chief of the FHFA, said in a letter to the Senate Banking Committee that he’s given the matter a lot of thought, but that the principal reduction part of the Home Affordable Modification Program “would not make a meaningful improvement in reducing foreclosures in a cost-effective way for taxpayers.”
U.S. Treasury Secretary Timothy Geithner has already responded to express his disapproval of DeMarco’s decision.
“I am concerned by your continued opposition to allowing Fannie Mae and Freddie Mac to use targeted principal reduction in their loan modification programs,” he wrote, according to MarketWatch. He argues that participating in the program could lead to help for 500,000 homeowners and save Fannie and Freddie $3.6 billion when compared to other loan-modification programs.
“In view of the clear benefits that the use of principal reduction by [Fannie and Freddie] would have for homeowners, the housing market and taxpayers, I urge you to reconsider this decision,” he wrote.
Fannie and Freddie own or back around 56% of all mortgages in the country, with 11 million of those homeowners currently owing more than their homes are worth.
DeMarco is worried, however, that borrowers who are doing fine with paying their loans right now will intentionally go delinquent or claim they need help in order to qualify for principal reduction. He added that if 3,000 to 19,000 borrowers who are current on their mortgages took that tack, it would offset any taxpayer benefits the FHFA might see from letting Fannie and Freddie participate.
He suggested other steps instead to help the housing market recover as a whole, like streamlining the refinancing process, and enhancing short sale procedures.
Fannie Mae regulator says no to principal cuts [MarketWatch]