By Margaret Chadbourn
WASHINGTON, April 10 (Reuters) – The regulator for Fannie
Mae and Freddie Mac said on Tuesday it might
make sense for the housing finance companies to write down loan
principal under an Obama administration plan, but further study
was needed.
The White House in January offered financial incentives to
the two government-controlled mortgage market giants, which have
been propped up with more than $150 billion in taxpayer funds,
to help cover any increased costs they might face forgiving loan
principal.
Edward DeMarco, the acting director of the Federal Housing
Finance Agency, said a preliminary analysis showed the firms
could save $1.7 billion under the plan to have Fannie Mae and
Freddie Mac cut loan balances for so-called “underwater”
borrowers who owe more than their homes are worth.
Delivering his remarks at a speech at the Brookings
Institution, he said one aspect to be considered was that the
program might encourage borrowers to strategically default to
obtain aid, driving up the cost, and said that even if the
companies saved money, taxpayers would still be on the hook for
the financial incentives.
DeMarco also said the program would help only about one
million borrowers, only a fraction of the estimated 11 million
underwater U.S. homeowners nationwide.
“This is not about some huge difference-making program that
will rescue the housing market,” he said. “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.”
Before the incentives were on the table, DeMarco had
maintained that Fannie Mae and Freddie Mac could provide as much
relief to distressed borrowers at less cost to taxpayers through
loan forbearance.
The two companies, which were seized by the government in
2008 as loan losses mounted, now finance about 60 percent of all
new mortgages.
TRIPLED INCENTIVES
The plan DeMarco is considering would triple the financial
incentives for principal relief offered by the Treasury
Department under the Home Affordable Modification Program, and
it would pay Fannie Mae and Freddie Mac as much as 63 cents for
every dollar of mortgage debt they forgive.
The costs would be covered by the Troubled Asset Relief
Program, the government’s financial rescue fund.
By offering money from TARP, the administration hopes to
overcome DeMarco’s objections. As the conservator of the two
companies, FHFA is charged with conserving the firms’ assets.
DeMarco said FHFA estimated that the Treasury would need to
provided $3.8 billion in incentives. Taking into account the
savings for Fannie Mae and Freddie Mac, he said that would mean
the net cost to taxpayers would be $2.1 billion, not counting
the possibility that some borrowers could strategically default
to obtain aid.
The regulator has promised to provide a final answer later
this month on whether the incentives now make it worthwhile for
Fannie Mae and Freddie Mac to write down loan balances.
DeMarco said his agency still needs to determine the
program’s likely operational cost and how it could track whether
or not borrowers are strategically defaulting. It also needs to
consider how the companies could work with mortgage servicers to
develop technology and training to launch the initiative, he
said.
The regulator has been under intense political pressure to
allow Fannie Mae and Freddie Mac to forgive mortgage principal.
Many Democrats argue the step would help lay a base for a
housing recovery.
Representative Elijah Cummings of Maryland, who has taken
the lead on the issue for Democratic lawmakers, said he was
“encouraged” by DeMarco’s speech, but added: “The jury is still
out on whether he will act to serve both homeowner and taxpayer
best interests.”
