Housing Finance Chief Blocked Mortgage Principal Reduction Plan

According to Reps. Elijah Cummins of Maryland and John Tierney of Massachusetts, acting director of the Federal Housing Finance Agency, Edward DeMarco, failed to implement a plan that would have saved taxpayers money by cutting loan principal balances for millions of underwater homeowners.

A top U.S. housing regulator Mr. DeMarco oversees mortgage giant Fannie Mae and has, “apparently been withholding from Congress” documents showing the potential benefits of the program to taxpayers and homeowners, wrote the two Democrats, in a letter to DeMarco that was released to MSNBC.com.

Cummins and Tierney cited internal documents at government-controlled Fannie Mae describing the pilot program with Citibank, beginning in 2009, that showed that “principal reduction programs have enormous potential to save U.S. taxpayers significant amounts of money.”

Since last fall there have been calls from more than 100 members of Congress to reduce principal balances on underwater mortgages. The action could help reduce taxpayer losses on government-owned loans and keep more families in their homes.

So far the government has spent more than $160 billion in taxpayer funds to prop up Fannie Mae and sister agency Freddie Mac.

The collapse of the housing market in 2006 has erased some $7 trillion of equity from the value of American homes and left roughly 11 million homeowners owing their lender more than their home is worth.

Those homeowners, unable to sell their homes, are locked out of the housing market and cannot help in creating the buying demand needed to support any housing recovery. Five years into the housing recession, they’re also more likely to consider walking away from their mortgage, adding to the backlog of foreclosures that could further depress home prices, forcing more households underwater.

To help stabilize the housing market, proponents of principal reduction say that homeowners and lenders would benefit greatly by avoiding those defaults and foreclosures.

According to the letter sent to DeMarco, Fannie Mae officials were impressed with the results of the Citibank pilot program.

In a December 2009 review, Fannie Mae officials estimated that cutting loan balances would cost about $1.7 million to implement and taxpayers would see a potential  savings of more than $410 million. More than half of Fannie Mae customers would benefit from the program within six months.

In November 2010, Fannie Mae officials prepared a research paper that concluded that “Fannie Mae might reduce its losses substantially in many cases by writing down principal.” The paper said Fannie Mae losses resulting from foreclosures following default were “large multiples of the amounts by which the loans were underwater,” according to the documents cited in the letter.

In response to congressional pressure, DeMarco agreed to review the agency’s opposition to cutting principal balances on Fannie Mae and Freddie Mac mortgages. Last month, in a speech at the Brookings Institution in Washington, DeMarco outlined some of the reasons for his opposition to the policy.

“Most Americans that are underwater on their mortgage realize they’ve signed a contract — they’ve got an obligation to make that payment and in fact they are,” DeMarco said. Those underwater homeowners should be encouraged to continue doing so, he added.

“There is increasing data available, we believe, that shows that … principal reduction can be good not only for homeowners and communities, but for investors as well,” Shaun Donovan, secretary of Housing and Urban Development, told a Senate panel this year. “It can allow people to pay [their bills], stay in their homes and increase the value of those mortgages.”

“Private lenders are doing it for an increasing share of their (mortgage portfolios) when it makes sense,” Andrew Jakabovics, a research director at Enterprise Community Partners, told reporters in a panel discussion following DeMarco’s Brookings speech. “If (Fannie and Freddie) aren’t willing to do it, there are plenty of investors who are buying these notes because economically it makes a lot of sense.”

The White House also has encouraged Fannie and Freddie to include principal reduction as part of their mortgage relief efforts.