When Fannie and Freddie Met Eddie

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By Deborah Solomon

Edward DeMarco, acting director of the Federal Housing Finance Agency, is running out of reasons to stop Fannie Mae and Freddie Mac from engaging in so-called principal forgiveness.

Democratic lawmakers have unearthed internal Fannie Mae documents showing the mortgage giant was prepared in 2010 to forgive a portion of troubled borrowers' outstanding loans. Fannie's internal analysis determined the pilot program, which would let Fannie share in any appreciation of the home's value, could prevent foreclosures and save money for U.S. taxpayers. Fannie estimated the program would cost about $1.7 million while providing more than $410 million in benefits.

"Despite the clear conclusion reached by Fannie Mae officials that principal reduction would reduce losses to the taxpayer, this pilot program was prevented from ever getting off the ground," the lawmakers allege in their May 1 letter to DeMarco.

At the same time, James Lockhart -- DeMarco's immediate predecessor at FHFA -- endorsed principal forgiveness as long as it allowed Fannie and Freddie to benefit from price appreciation.

"There should be some experimentation," Lockhart said today at the Bloomberg Link Washington Summit. "Foreclosure is not the answer."

DeMarco has offered several reasons that Fannie and Freddie should not proceed with principal forgiveness. It could increase costs to taxpayers, he has said, and encourage "strategic defaults," in which borrowers simply stop making mortgage payments to qualify for debt forgiveness.

But the shared appreciation model is a solution to these hurdles. Fannie's documents and Lockhart's comments provide further justification.

On Tuesday, DeMarco fired back at lawmakers for releasing what he called "selective elements of the proprietary and confidential materials you received" and said he "strongly" disagrees with the questioning of FHFA's motives. DeMarco said in the letter he's still considering the idea but has already missed a self-imposed April 30 deadline to give a decision. One can only hope he's late because he's trying to figure out how best to announce his change of heart.

(Deborah Solomon is a member of the Bloomberg View editorial board. Follow her on Twitter.)


-0- May/01/2012 19:51 GMT