Having failed to get Fannie Mae and Freddie Mac on board helping struggling homeowners in California, Attorney General Kamala Harris is trying a new tact: asking Edward DeMarco, the government bureaucrat who effectively controls the agencies, to stop foreclosures altogether.
In a letter sent Friday, Harris asked DeMarco, the embattled head of the Federal Housing Finance Authority, to suspend foreclosures in California until the agency "has completed a thorough, transparent analysis of whether principal reduction is in the best interest of struggling homeowners as well as taxpayers." There are as many as 500,000 homes in California in foreclosure or at imminent risk of foreclosure, Harris said. More than half of those loans are owned or controlled by Fannie Mae or Freddie Mac.
It isn't clear why DeMarco would halt foreclosures, a dramatic and probably expensive step, when he won't consider principal reduction -- loan write-downs to encourage borrowers to keep making payments and to stave off foreclosure. That's kind of like a child asking her parent for a slice of pizza, and on rejection, asking instead for the whole pie. The letter instead is likely intended to ratchet up pressure on DeMarco in advance of a Senate housing committee hearing on Tuesday.
That pressure is already high. In recent weeks, other state attorneys general, including New York's Eric Schniederman, have hinted that they will try to bring pressure on DeMarco to write down loans through their investigations of how the mortgage companies packaged rotten mortgages into bonds.
So far, those efforts have been futile. DeMarco has refused to allow principal reductions on the 60 percent of home loans controlled by Fannie Mae and Freddie Mac, arguing that they would harm taxpayers who have already lost an estimated $169 billion on the mortgage giants. His position has meant that some $20 billion in homeowner aid promised by five banks as part of the national foreclosure settlement will not go to borrowers with a Fannie or Freddie loan.
Attempts by the Obama administration to replace DeMarco have also failed. "Our goal is to get a good nominee and get someone in there who shares our view," Shaun Donovan, the Secretary of Housing and Urban Development, said in a recent interview with The Huffington Post.
Donovan also said he hoped the mortgage deal would overcome a "quasi-religious resistance to principal reduction" in the market.
In a statement this month, Fannie Mae said that it had conducted small-scale pilot programs and determined that principal reduction poses a number of challenges, "including significant technological and systems complexity and substantial cost without proven effectiveness."
Despite Fannie Mae's claim that principal reductions are not cost effective, Treasury Department data shows that modification efforts that include principal reduction are more likely to prevent default than other loan restructurings.
An FHFA spokeswoman did not immediately respond to a request for comment.
Harris is one of DeMarco's most outspoken critics. She has called on him to resign, and in December, she filed suit against Fannie Mae in federal court. In her letter, she pleads for the mortgage giants to pause foreclosures while they reconsider how principal write-downs could benefit taxpayers and homeowners alike.
"As ground zero of this mortgage and foreclosure crisis, California's underwater homeowners deserve a straight-forward analysis from FHFA of whether a program of principal reduction by Fannie Mae and Freddie Mac will provide significant assistance to struggling homeowners as well as save precious taxpayer dollars," Harris wrote.
While the agency studies this, a "good faith pause on foreclosure sale in California is only appropriate," she wrote.