Fannie Mae (FNMA) and Freddie Mac won’t forgive principal on delinquent mortgages they guarantee even as the U.S. Treasury Department offers them incentive payments for writedowns, the companies’ regulator said today.
Months of analysis showed there would be no clear benefit to taxpayers if the Federal Housing Finance Agency changed its policy barring the government-owned mortgage-finance companies from loan modifications including debt writedowns, Edward J. DeMarco, the agency’s acting director, said at a briefing with reporters in Washington.
“We concluded the potential benefit was too small and uncertain relative to unknown costs and risks,” DeMarco said.
The decision follows months of pressure to reverse the policy from activist groups and congressional Democrats, who touted it as a way to keep more families from losing their homes to foreclosure. FHFA has been in talks since January with Treasury officials, who offered Fannie Mae and Freddie Mac (FMCC) as much as 63 cents for each dollar of principal reduction, using unspent funds from the Troubled Asset Relief Program.
Treasury Secretary Timothy F. Geithner criticized FHFA’s decision in a letter to DeMarco.
“I do not believe it is the best decision for the country,” Geithner wrote. “The use of targeted principal reductions by the GSEs would provide much-needed help to a significant number of troubled homeowners.”
DeMarco’s stand and Geithner’s response reflect ongoing tension between FHFA, an independent agency, and President Barack Obama’s Democratic administration, which has pushed to expand aid for more than 11 million borrowers who owe more than their homes are worth in the wake of the 2008 credit crisis.
The announcement underscored DeMarco’s reputation for independence, said Tim Rood, managing director of the Collingwood Group, a Washington-based consulting firm.
“You’ve got to give the guy credit for being a steward of the taxpayer dollars, and he should be a shining example for other politicians,” Rood said in a telephone interview. “The best decision is not always the easiest decision.”
DeMarco drew praise from investor and banking groups, who said debt writedowns would make lenders more reluctant to provide credit to borrowers who show default risk, and scorn from homeowner advocates, some of whom called for his firing.
“It is incomprehensible that Mr. DeMarco would reject the chance to save up to a billion dollars in taxpayer funds while helping nearly half a million homeowners,” said Representative Elijah E. Cummings, a Maryland Democrat on the House Oversight and Government Reform Committee. “He should immediately withdraw this reckless and misguided letter.”
Julian Mann, who helps oversee $5.94 billion in bonds as a vice president at Los Angeles-based First Pacific Advisors LLC, said he was pleased.
“DeMarco is doing the right thing, looking after the taxpayer and recognizing that these measures don’t perceptibly move the needle when trying to floor the housing market,” Mann said. “It’s a relief both as an investor and as a homeowner.”
Principal writedowns are gaining popularity in modifications of loans backed by lenders and private investors. About 10 percent of such modifications now involve writedowns, according to data from the Office of the Comptroller of the Currency.
The technique may work better for private investors because they can choose which loans are eligible, an almost impossible task for Fannie Mae and Freddie Mac, who are dealing with more than 1,000 different loan servicers, DeMarco said.
He released a detailed analysis showing that under most scenarios, even while there might be a net benefit to the government-sponsored enterprises, taxpayers would lose money because they would be funding the program through the Treasury.
Fannie Mae, based in Washington, and Freddie Mac of McLean, Virginia, have drawn almost $190 billion in Treasury aid since they were taken under U.S. conservatorship in 2008 amid loan losses that pushed them to the brink of insolvency.
“It is our concern, not just how does this affect the enterprises, but we also have a responsibility to assess how does this affect the taxpayer,” DeMarco said.
The analysis, which builds on a study FHFA released in April, looked at the costs and benefits of reducing principal on troubled loans under different scenarios, including how many eligible borrowers would participate and the ratio of their debt to income. In addition, DeMarco said, the administrative costs of the program could reach $90 million.
Like previous FHFA analyses, the most recent data predicted that loan forgiveness would create new costs for the taxpayer- funded firms by encouraging defaults among borrowers who have kept making payments even though they owe more than their homes are worth. Three out of every four so-called underwater borrowers with GSE loans are current.
Fannie Mae and Freddie Mac have completed 1.1 million loan modifications since the end of 2008 and have engaged in more than 1 million other transactions to avert foreclosures, including short sales or repayment plans.
Fannie Mae’s 3 percent, 30-year securities rose 0.18 percent to 104.09 cents on the dollar as of 4:46 p.m. in New York, according to data compiled by Bloomberg.
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