Regulator: Mortgage principal reductions could save $1.7 billion
Fannie Mae and Freddie Mac could save $1.7 billion by reducing the amount that some underwater homeowners owe on their mortgages, according to a preliminary analysis by the regulator for the seized housing finance giants.
But a principal reduction program by the government-owned companies, which many economists, lawmakers and state officials have called for, would not solve the housing market’s problems, the head of the regulating agency said Tuesday.
In addition, it could encourage homeowners who are making their monthly payments to fall behind in order to reduce the principal on their loans, adding to the $188 billion in taxpayer money already pumped into the companies to keep them afloat, said Edward DeMarco, acting director of the Federal Housing Finance Agency.
“This is not about some huge difference-making program that will rescue the housing market,” DeMarco said in a speech at the Brookings Institution. “It is a debate about which tools, at the margin, better balance two goals: maximizing assistance to several hundred thousand homeowners while minimizing further cost to all other homeowners and taxpayers.”
DeMarco has been harshly criticized for refusing to order Fannie and Freddie to launch a broad principal-reduction program, which advocates say would reduce foreclosures and stabilize the housing market.
California Atty. Gen. Kamala Harris and numerous congressional Democrats have called for President Obama to fire DeMarco, though it is difficult to remove the head of an independent agency.
DeMarco has said there are more cost-effective ways to help homeowners, such as reducing their monthly payments through lower interest rates, without reducing the amount they owe on their mortgages.
But the Obama administration and lawmakers have pushed DeMarco to reassess his position, particularly after the administration tripled the financial incentives for the owners of mortgages to do principal reductions.
On Tuesday, DeMarco released the findings from a preliminary analysis of the financial impact on Fannie and Freddie of principal reductions with the new incentives. It found that Fannie and Freddie would reduce their losses by $1.7 billion on the approximately $137 billion in mortgages that would be eligible, DeMarco said.
He also noted that the $3.8 billion in principal reduction incentives that would be paid by the Treasury Department would more than offset those savings, with taxpayers paying a net cost of $2.1 billion if Fannie and Freddie launched such a program.
But that price tag “does not account for any offsetting benefits in terms of greater housing market stability” if principal reductions reduced foreclosures, DeMarco said. Those benefits, however, would be hard to quantify, he said.
The agency will finish its analysis soon and DeMarco has said he would make a decision by the end of the month on whether to implement a principal-reduction program. But he said the financial savings weren’t the only issue.
While such a program would be aimed at people who are already behind on their payments, it could entice some underwater homeowners who have been making their monthly payments to intentionally fall behind so that they could have the amount they owe reduced as well.
“A key risk in principal forgiveness targeted at delinquent borrowers is the incentive created for some portion of these current borrowers to cease paying in search of a principal forgiveness modification,” he said.
Rep. Elijah Cummings (D-Md.), a leading advocate for principal reductions, said he was encouraged by DeMarco’s comments but “the jury is still out on whether he will act to serve both homeowner and taxpayer best interests.”
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