Edward DeMarco isn't ready to blink yet on principal reductions, even though doing so could save Fannie Mae and Freddie Mac $1.7 billion.
On Tuesday, DeMarco, the acting director of the Federal Housing Finance Agency, said a new analysis by his agency found that writing down the loan value of some underwater mortgages controlled by Fannie Mae and Freddie Mac could lower the foreclosure rate, and thus save a lot of money for the mortgage giants. But the analysis did not incorporate other potential costs, he said, including the risk that otherwise current homeowners might "strategically default" just so they could take advantage of the savings.
The Federal Housing Finance Agency has overseen Fannie Mae and Freddie Mac since 2008, part of the early fallout from the mortgage crisis.
DeMarco downplayed the importance of principal reduction. "This is not about some huge difference-making program that will rescue the housing market," he said in prepared remarks for a speech at the Brookings Institution. "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."
DeMarco, who has firmly opposed principal reduction, now says that he is committed to working with Congress and the Obama administration "on these difficult questions" -- a subtle but definite softening of his stance. He did not, however, announce any timetable for whether or when principal reductions might be in the works.
To forgive or not to forgive has become the most pressing question in the federal government's scattershot response to the foreclosure crisis. Five large banks recently agreed to reduce the outstanding principals of troubled borrowers by $10 billion as part of a national mortgage settlement, but Fannie Mae and Freddie Mac, which together control 60 percent of the mortgage market, have refused to participate. Proponents have argued that this type of relief is an essential tool for helping millions of borrowers who want to stay in their homes, but are facing the financial reality that they can't.
The key obstacle appears to be DeMarco, who has argued that his obligation is to protect taxpayers who have already spent hundreds of millions of dollars to prop up the mortgage giants. DeMarco has repeatedly defended his stance, even in the face of increased pressure from the Obama administration, some members of Congress and news columnists. He has argued that steps Fannie Mae and Freddie Mac are already taking, such as reducing the interest rate on loans and offering to postpone, or "forbear," mortgage payments, will help struggling borrowers without posing the moral and financial hazards that come with reducing the value of a loan.
DeMarco agreed to review his agency's policies after the Treasury Department announced that it would triple the incentives for investors, such as Fannie Mae and Freddie Mac, to forgive principal under the government's Home Affordable Modification Program. Proponents of principal reduction hoped that the review would lead to immediate action to help some of the estimated one in five underwater homeowners.
But a rapid response does not seem to be in the works. DeMarco appears most worried about those "strategic modifiers" -- that portion of the 11 million borrowers in the United States who might decide to stop paying their mortgage in the hope that they, too, might claim the average $51,000 principal reduction granted non-Fannie and Freddie borrowers under the existing loan modification program. It would take 91,000 strategic defaults to make principal reduction no longer cost-effective, according to DeMarco.
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