“The FHFA’s refusal to allow for principal write-downs that would result in more loan modifications is a direct impediment to our economic recovery and stands in way of our efforts to provide much needed assistance to homeowners in New York and across the country,” said New York Attorney General Schneiderman in a statement. “Under the leadership of Acting FHFA Director Edward DeMarco, Fannie Mae and Freddie Mac remain an obstacle to progress by refusing to adopt policies that will help maximize relief for struggling homeowners. The time has come for the President and Congress to work together to install a new, permanent leader at FHFA that will be a partner, not an impediment, in the national effort to comprehensively address the foreclosure crisis.”
In the letter [PDF] — addressed to the President, along with Senators Harry Reid and Mitch McConnell, and signed by Schneiderman and the Attorneys General of Massachusetts, California, Delaware, Illinois, Maryland, Nevada, Oregon, and Washington — the states argue that it only makes sense for Freddie and Fannie to follow the same model set out in last year’s mammoth settlement between 49 states and the five largest mortgage servicers, which includes the use of principal write-downs to provide relief to homeowners with mortgages worth more than the current value of their homes.
“When loan modifications employ principal write-downs as necessary to create an affordable modified loan, countless more families will avoid unnecessary foreclosure,” reads the letter. “Unfortunately, under the leadership of Acting FHFA Director Edward DeMarco, Fannie Mae and Freddie Mac remain an obstacle to progress by refusing to adopt policies that will help maximize relief for homeowners.”
The letter takes issue with FHFA’s position reducing the principal on these homes would harm the value of its loan portfolio, saying such a stance is “not supported by reality.”
“It is far more profitable for any financial institution to hold a portfolio of performing $200,000 mortgages that keeps families in their homes than a portfolio of non-performing $250,000 mortgages headed toward default,” argue the AGs. “FHFA’s refusal to consider principal write-downs as part of a comprehensive mortgage modification policy is inconsistent with its combined goal of asset preservation and foreclosure prevention. Simply put, by refusing to allow for principal write-downs that would result in more loan modifications, FHFA stands as a direct impediment to our economic recovery.”
This isn’t the first time that DeMarco has been taken to task for his stance on principal write-downs. In July, Treasury Secretary Tim Geithner told the Acting Director, “I am concerned by your continued opposition to allowing Fannie Mae and Freddie Mac to use targeted principal reduction in their loan modification programs,” and argued that write-downs could aid as many as 500,000 homeowners and ultimately save Fannie and Freddie $3.6 billion.