Recent modifications to HAMP (Home Affordable Modification Program) made Fannie Mae and Freddie Mac eligible to receive incentives for providing homeowners with principal reductions. However, there has not been a commitment by the Federal Housing Finance Agency, which oversees Fannie and Freddie, to offer such reductions.
Edward DeMarco, acting director of the FHFA, indicated that additional analysis would have to be performed to determine the long-term benefits of principal reductions. Yet, according to a letter dated May 1, 2012, from the U.S. Congress Committee on Oversight and Government Reform, that analysis had already been completed and the FHFA had previously given the green light to Fannie Mae to offer homeowners mortgage principal reductions.
The letter, directed to DeMarco, comes on the heels of controversy the Acting Director has received for his reluctance to reduce principals for struggling homeowners. DeMarco has backed his decision by the fact that extensive, detailed analysis must first be completed, also stating that principal reductions are more costly than other measures and that he is acting in the interests of taxpayer dollars that have been used to save Fannie Mae and Freddie Mac. Information that has recently come to light shows, however, that it was determined in 2009 that a principal reduction program would cost $1.7 million, but the benefits could amount to $410 million. A pilot program with Fannie Mae and Citibank was proposed, but abruptly stopped in July, 2010, with little explanation.
Testifying on November, 16, 2011, DeMarco didn't divulge the previous extensive analysis and approval of a principal reduction program to Congress. This withholding of information came to light after investigation by Committee on Oversight and Government Reform, which has obtained several documents from Fannie Mae officials that discuss the analysis and the pilot program in detail.
As a result, the Committee is calling on DeMarco and the FHFA to submit any documents relating to reductions in mortgage principal by May 11. In addition, in light of evidence that contradicts DeMarco's testimony, they are inquiring into the responses by the FHFA in regard to his November testimony and other responses to their requests.
According to the nine-page letter, it is alleged that Fannie Mae had performed extensive, detailed analysis on principal reductions and found that it would be less costly to Fannie and taxpayers than foreclosures, and documents obtained later also revealed:
• That Fannie Mae's Risk Subcommittee stated that "underwater borrowers will perform better on a modification that reestablishes equity."
• That loans that receive principal reductions re-default at far lower rates than loans that receive other types of modifications.
• That the proposed pilot program would benefit more than fifty percent of Fannie's customers.
• Benefits of the pilot program would be visible within six months, and
• It was determined that a failure to implement a principal reduction program would have high negative impacts.
Based on the information revealed and the documentation quoted by the Oversight Committee, lawmakers are now delving further into the motives behind the FHFA's reluctance to commit to principal reductions, as well as the reasons why they withheld crucial information from Congress.
Whether this new information or the subsequent investigation will change the outcome for Fannie Mae's struggling homeowners who could benefit from principal reductions remains to be seen. However, the International Monetary Fund (IMF) has voiced their support for principal reductions, as noted by Christine Lagarde, IMF managing director, who has stated the housing crisis is a matter of urgency and this as an "opportunity to push on and take the further actions that are certainly needed to keep the crisis at bay and finally put it behind us." According to the IMF,
Principal reductions are likely to reduce foreclosure rates and, if implemented on a large scale, would support house prices substantially -- helping to eliminate the overall uncertainty weighing on the housing market.
The IMF's support, as well as that of other lenders and agencies, correlates with the original analysis by Fannie Mae and the FHFA that principal reductions could be one of the most beneficial actions that can be taken to reverse the housing crisis.
A May 1, 2012, response by Edward DeMarco indicates that Fannie Mae's pilot program was not implemented after consideration of staff perspectives and experiences at the corporate level, stating "operational concerns" as the primary reason for reversing their initial support for principal reductions. Absent in this response is a reference to DeMarco's omission of the program in his November 2011 testimony before Congress.
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