It has been a tug of war between the Obama administration and the director of the Federal Housing Finance Agency for months now – should Fannie Mae and Freddie Mac be allowed to write down the balances of troubled mortgage loans on their books? On Tuesday, FHFA head Edward DeMarco again put his foot down with a new statement; Fannie and Freddie will not use taxpayer dollars to reduce principal balances.
The Obama administration put forth a plan several months ago, proposing that mortgage guarantors Fannie and Freddie receive bailout money under the Home Affordable Modification Program as incentives to write down the balances of underwater borrowers.
DeMarco and the FHFA have balked at that plan, unwilling to eat up more taxpayer dollars by letting borrowers off the hook for that reduced principal. Since being taken over by the government back in 2008, Fannie and Freddie have already used $190 billion of federal bailout money to stay afloat.
In his statement, DeMarco said that after careful research,
the ”FHFA has concluded that the anticipated benefits do not outweigh the costs and risks,” and the agency “concluded that [principal reduction] did not clearly improve foreclosure avoidance while reducing costs to taxpayers relative to the approaches in place today.”
Treasury Secretary Timothy Geithner immediately dispatched a letter to DeMarco, urging reconsideration. Allowing Fannie and Freddie to cut the loan balances for certain individuals who owe more than their homes are worth would
“provide much needed help to a significant number of troubled homeowners, help repair the nation’s housing market and result in a net benefit to taxpayers,” he wrote.
DeMarco has consistently voiced his concern that this plan would encourage borrowers to strategically default in order to take advantage of the write-downs, causing greater loss from government-back mortgages.
The Obama administration maintains that the program could save almost a half million homeowers and end up saving taxpayers up to $1 billion. The FHFA, though, believes only a fraction of that number would actually receive help based on the limited success of previous foreclosure-aid programs.