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Fannie Mae backed principal reductions, internal documents show

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WASHINGTON -- Fannie Mae officials supported principal reductions for some struggling homeowners in 2009 and believed they would save taxpayer money, but a pilot program set to start a year later was abruptly canceled apparently for ideological reasons, according to internal documents obtained by two House Democrats.

The documents contradict congressional testimony in November by Edward DeMarco, the regulator for Fannie Mae, who has opposed principal reductions, said Reps. Elijah Cummings of Maryland and John Tierney of Massachusetts.

The lawmakers also said DeMarco, acting director of the Federal Housing Finance Agency, withheld some of the documents from their request for information about principal reduction reports and other findings from the agency and Fannie Mae and Freddie Mac.

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“Contrary to your testimony, we have now obtained a wide range of internal documents demonstrating that Fannie Mae officials conducted detailed, substantive analyses and concluded years ago that principal reduction programs have enormous potential to save U.S. taxpayers significant amounts of money by reducing overall losses from foreclosures following default,” Cummings and Tierney wrote in a letter Tuesday to DeMarco.

The lawmakers said the failure by Fannie Mae to launch a principal reduction program “was not merely a missed opportunity, but a conscious choice that appears to have been based on ideology rather than Fannie Mae’s own data and analyses.”

An FHFA spokeswoman said the agency had just received the letter and had no immediate comment.

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Cummings and Tierney have been part of an aggressive campaign by congressional Democrats, Obama administration officials and housing advocates to get Fannie Mae and Freddie Mac to start a wide-scale program to reduce the principal owed by struggling homeowners to help keep them out of foreclosure and heal the real estate market.

DeMarco has strongly resisted that push, leading to calls for him to be fired. He has argued there are less costly ways to assist distressed homeowners and that the FHFA’s must protect the $188 billion in taxpayer money pumped into Fannie and Freddie since they were seized by the government in 2008.

The FHFA has been conducting a new analysis based on increased Treasury Department incentives for principal reductions. DeMarco said last month that preliminary findings showed Fannie and Freddie could save $1.7 billion by reducing principal for some homeowners.

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But DeMarco cautioned at the time that such a program would not solve the housing market’s problems. He indicated the agency would make a decision by the end of April.

But an FHFA spokeswoman Tuesday the agency was still working on its analysis and was in discussions with Treasury officials and would defer a final determination “until we conclude these activities.”

The documents cited by Cummings and Tierney said that Fannie officials worked with Citibank starting in 2009 on a shared-equity principal reduction pilot program, in which the homeowner and investor apparently would share in any appreciation of equity when the home was sold.

A November 2009 presentation to Fannie Mae’s risk subcommittee said that there was a strong case for such a program and that “underwater borrowers will perform better on a modification that re-establishes equity.”

A December 2009 document estimated that more than half of Fannie Mae’s customers would “see some benefit from the project.” The program would cost $1.7 million, but “benefits could total more than $410 million,” according to the document cited by the lawmakers.

But the plans were abruptly canceled in July 2010. And a former Fannie Mae employee told the lawmakers that it was stopped by officials “philosophically opposed to writing down principal balances.”

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Cummings and Tierney criticized DeMarco for not mentioning the documents when he testified before the House Oversight and Government Reform Committee in November that analysis had shown principal reduction “was not going to be the least-cost approach for the taxpayer.”

The lawmakers requested that FHFA turn over all documents related to principal reductions by May 11, as well as all internal communications and documents related to the agencies response to their earlier requests for information.

Cummings and Tierney also said they wanted interviews with Fannie Mae officials named in the documents.

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