Fannie Mae Nixed Plan to Reduce Mortgage Debt, Democrats Say

Fannie Mae pulled the plug on a 2010 plan to forgive borrowers’ mortgage debt because company executives were “philosophically opposed” to the idea, a former company employee told House investigators.

In a letter today to the Federal Housing Finance Agency, House Democrats challenged a January analysis from Acting Director Edward J. DeMarco that claimed principal writedowns would raise costs and increase taxpayer losses at the government-owned company.

“We have now become aware of new information that calls into serious question the accuracy and completeness of your response, as well as your motivation for continuing to oppose principal reduction programs even when they have the potential to save American taxpayers billions of dollars,” said the letter from representatives Elijah Cummings of Maryland and John F. Teirney of Massachusetts, Democrats on the House Committee on Oversight and Government Reform.

FHFA spokeswoman Corinne Russell did not have an immediate comment. The agency oversees Fannie Mae and Freddie Mac, which were taken over by the federal government in 2008 as they neared bankruptcy.

According to the letter, a former Fannie Mae employee told the committee that the mortgage finance company had developed a pilot program for reducing mortgage debt for borrowers who owe more on their house than the property is worth.

The purpose of the plan was to develop “a responsible way to reduce principal balances for underwater mortgage borrowers without creating undue incremental moral hazard,” the employee told the committee.

The pilot had preliminary approvals from officials at Fannie Mae, FHFA, and the Office of the Comptroller of the Currency, a bank regulator, according to the former employee.

In mid-2010, two weeks before its launch, senior Fannie Mae executives cancelled the program because they were “philosophically opposed to writing down principal balances,” according to the former worker, who was quoted in the letter without being identified.

“I believe that we could be saving tens of billions of dollars while also helping stabilize housing prices and stimulating economic growth,” the former employee said, according to the letter.