Fannie and Freddie could save by reducing principal, study says

WASHINGTON — 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 Mae and Freddie Mac to launch a broad principal-reduction program, which advocates say would reduce foreclosures and stabilize the housing market.

California Atty. Gen. Kamala D. 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. 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 findings from a preliminary analysis of the financial effect on Fannie Mae and Freddie Mac of principal reductions with the new incentives. It found that Fannie and Freddie would reduce their losses by $1.7 billion on the roughly $137 billion in mortgages that would be eligible, DeMarco said.

DeMarco has said the agency would finish its analysis soon and decide whether to implement a principal-reduction program. But he said the financial savings weren’t the only issue.

Although 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, he said.

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