Fannie and Freddie won’t lower mortgage principal, regulator says

<i>This post has been corrected. See the note below for details.</i>

WASHINGTON — After a lengthy review, a key federal regulator said Tuesday he would not allow Fannie Mae and Freddie Mac to lower the amount some underwater homeowners owe on their mortgages despite new financial incentives from the Obama administration.

Detailed analysis has determined that principal reductions would cost taxpayers money and would not clearly improve the ability of homeowners to avoid foreclosure, said Edward DeMarco, acting director of the Federal Housing Finance Agency. The agency oversees Fannie Mae and Freddie Mac, the housing finance giants that were seized by the government in 2008 as they teetered on the brink of failure.

The Obama administration, Democratic officials and housing advocates have been pressuring DeMarco to allow Fannie and Freddie to lower the principal for underwater homeowners as a way of reducing foreclosures. Fannie and Freddie own or back about 60% of all mortgages. Some, including California Atty. Gen. Kamala Harris, have called for Obama to fire DeMarco because of his refusal to allow Fannie and Freddie to reduce principal.

But DeMarco has steadfastly refused out of concern that it would increase the cost of the taxpayer bailouts of Fannie and Freddie. As of June 20, taxpayers have pumped $188 billion into the two companies to keep them afloat. The companies have paid about $46 billion in dividends back to the Treasury Department in exchange for that assistance, leaving taxpayers on the hook for about $142 billion.

The FHFA has been reconsidering the position because of new Treasury incentives tripling the amount of money offered to owners of mortgages to do principal reductions.

But DeMarco said those incentives were still taxpayer money and did not offset the potential harm from a principal reduction program. He said such a program could encourage underwater homeowners who are making their payments to stop so they could qualify for a principal reduction. The FHFA analysis found that it would take just 3,000 to 19,000 borrowers out of 1.4 million underwater borrowers to offset any potential positives to the bottom-line of Fannie and Freddie from principal reductions.

“We weighed these potential benefits and costs, recognizing the inherent uncertainties associated with these estimates … and we concluded that the potential benefit was too small and uncertain relative to known and unknown costs and risks to warrant Fannie and Freddie” offering principal reductions, DeMarco told reporters.

He stressed that Fannie and Freddie offer an array of programs to help struggling homeowners, including those that lower monthly payments.

Treasury Secretary Timothy F. Geithner wrote to DeMarco on Tuesday asking him to reconsider his position.

“Five years into the housing crisis, millions of homeowners are still struggling to stay in their homes and the legacy of the crisis continues to weigh on the market,” Geithner said. “You have the power to help more struggling homeowners and help heal the remaining damage from the housing crisis.”

[For the Record, 1:30 p.m. July 31: An earlier version of this post stated that taxpayers were on the hook for $42 billion in the bailout of Fannie Mae and Freddie Mac. The actual figure is $142 billion.]


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