Rick Bowmer / AP
An auction sign in front of a home, in Salem, Ore.
By John W. Schoen, Senior Producer
Updated Tuesday at 5:15 p.m. ET:
A top U.S. housing regulator failed to implement a plan to cut loan
principal balances for millions of underwater homeowners even though a
pilot program showed two years ago it could save taxpayers money, two
House Democrats said Tuesday.
Edward DeMarco, acting director of
the Federal Housing Finance Agency, which oversees mortgage giant Fannie
Mae, "apparently ha(s) been withholding from Congress" documents
showing the potential benefits of the program to taxpayers and
homeowners, according to Reps. Elijah Cummins of Maryland and John
Tierney of Massachusetts. The two Democrats, in a letter to DeMarco that
was released to msnbc.com, said they obtained the documents from an
independent source.
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.”
Late Tuesday, Demarco responded by saying that
the pilot program was ended largely due to "operational concerns" and that "there was not full agreement to proceed" with the program at Fannie Mae and Freddie Mac.
(This story has been updated to reflect DeMarco's response.)
Since last fall, DeMarco has resisted pressure to reduce principal balances on underwater mortgages despite
calls from more than 100 members of Congress,
who have argued that 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.
DeMarco's resistance
to the idea is based on his "philosophical" opposition to reducing the
amount a homeowner owes, according to a former Fannie Mae official
quoted in the letter.
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 underwater, meaning they
owe their lender more than their home is worth.
Those homeowners,
effectively unable to sell their homes, are locked out of the housing
market and sidelined from 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 argue that homeowners and lenders are better off avoiding those defaults and foreclosures.
According
to the letter sent to DeMarco, those proponents include Fannie Mae
officials who were favorably impressed with the results of the Citibank
pilot program.
In a December 2009 review, Fannie Mae officials
estimated that the pilot program of cutting loan balances would cost
about $1.7 million to implement and generate potential taxpayer savings
of more than $410 million. That review estimated that "more than half of
Fannie Mae customers will see some benefit from the program" within six
months.
According to a November 2009 presentation to Fannie
Mae's risk analysts, redefault rates on loans given principal reductions
in the trial program were "far below rates on other modification
portfolios," according to the letter from Cummins and Tierney.
But
the program was suspended in July 2010, without explanation, according
to the letter. In November 2010, Fannie Mae officials continued to press
internally for principal reductions. To make their case, they 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.
But other government
officials argue that by cutting principal or deferring a portion of the
balance until a home is sold, some defaults could be prevented, thereby
reducing losses and foreclosures. The recent mortgage settlement among
49 states, several federal agencies and five large banks aims to promote
the practice by providing those lenders with financial incentives to
cut loan balances.
"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."
In
his Brookings speech,
DeMarco repeated his philosophical concerns - an argument also known as
"moral hazard" - that offering principal reduction to some homeowners
could prompt others who are current on their loans to ask to have their
loan balances cut.
“The far larger group of underwater borrowers
who today have remained faithful to paying their mortgage obligations
are the much greater contingent risk to housing markets and to
taxpayers,” DeMarco said.
Philosophical arguments aside, investors
holding underwater mortgages have found that, in some cases, they can
reduce losses by cutting principal balances.
“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.
The debate took a bizarre twist last month when
FHFA's inspector general, who is charged with detecting "fraud, waste
and abuse" in the agencies, reported that Freddie Mac alone could save
taxpayers “significant” sums of money if it pressed the companies
servicing its mortgages to modify more loans. But the amounts to be
saved were blacked out at the insistence of FHFA "and/or" Freddie Mac,
according to the report.
In his Brookings speech, DeMarco said
FHFA would soon complete its review and promised to have an answer
within a few weeks. FHFA has now backed away from that timeline and
would not provide a date for a decision.
“FHFA continues to work
on its principal forgiveness analysis and is in discussions with the
Department of the Treasury,” a spokeswoman said Monday. “A final
determination ... is being deferred until we conclude these activities.”
FHFA
was created by the Bush administration to oversee the bailout of Fannie
Mae and Freddie Mac, government-chartered entities that collapsed under
the weight of defaulting loans following the housing collapse. DeMarco
was named acting head of the agency about a year later when his
Bush-appointed predecessor stepped down.
In December 2010,
President Barack Obama’s nomination to replace DeMarco, former North
Carolina banking commissioner Joseph Smith, was approved by the Senate
Banking Committee, with three Republican crossing the aisle to support
the appointment. But the nomination was blocked by Republicans on the
Senate floor, in part because they felt Smith would be too generous in
support of homeowners seeking to modify loans held by the government
"He
will be a tool of the administration, cutting mortgages, throwing the
bill to the taxpayers," Sen. Richard C. Shelby, R-Ala., ranking member
of the Banking Committee, told reporters following Smith’s confirmation
hearing.
Smith was recently appointed to monitor the compliance of
five large banks with the terms of the state-federal settlement over
fraudulent and abusive mortgage foreclosure practices.
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