House Dems Urge Fannie, Freddie to Write-Down Mortgages

Twenty-one Democrats in the U.S. House of Representatives are urging the regulator of Fannie Mae and Freddie Mac to reconsider its policy of denying any mortgage modifications that reduce a homeowner’s principal balance.
U.S. Rep. Brad Miller, D-North Carolina, a member of the House Financial Services Committee, along with twenty colleagues, has sent a letter to Edward DeMarco, Acting Director of the Federal Housing Financing Agency (FHFA).
DeMarco has said that principal write-downs would undermine the finances of the two mortgage-financing giants, Fannie and Fannie, which are both under government-control and recipients of more than $170 billion in bailout funds since the financial crisis erupted three years ago.
“We understand that the Federal Housing Finance Agency’s objective in the conservatorship of Fannie Mae and Freddie Mac (the enterprises) must be to minimize taxpayer costs,” the letter states. “We do not urge that the enterprises reduce principal on mortgages as a kindness to homeowners, as sympathetic as the circumstances of many homeowners are. We strongly believe, however, that the continued refusal to reduce principal in any circumstances is greatly increasing taxpayer losses.”
The Democratic House members are urging DeMarco to disregard the “short-term accounting treatment” of principal reductions and consider the long-term consequences for taxpayers.
“Underwater mortgages are obviously at great risk of eventual default, and the costs of foreclosure are brutal,” the letter states.
The Democrats said that first- and second-quarter credit supplements from Freddie Mac reported that 19 percent of its single-family, loan guarantee portfolio was underwater, based on unpaid principal balance. Fannie Mae reported that 17.7 percent was underwater.
“In short, principal reductions of underwater mortgages could reduce the risk of default for almost 20 percent of the enterprises’ portfolios,” the letter said.
Fannie and Freddie officials, and other opponents of widespread mortgage write-downs, fear that such a policy would create “moral hazard” among borrowers, prompting homeowners to stop making mortgage payments who wouldn’t do so if write-downs were not available.
However, economists see principal reductions has a needed tool in ongoing Obama Administration efforts to stem the foreclosure crisis.
In a report released last wee, the nonpartisan advocacy group which predicted the subprime mortgage collapse five years ago, concludes that the nation is not even halfway through the foreclosure crisis, with 3.6 million additional borrowers at serious risk of losing their homes.
“Again, we strongly urge that you reconsider your refusal to allow principal reductions to achieve better performing modifications and avoid the extreme losses of unnecessary foreclosures,” states the letter from the Democrats, “and that FHFA consider only the eventual costs to taxpayers of the conservatorship, not the illusory accounting treatment that now appears to guide FHFA’s modifications.”

2 thoughts on “House Dems Urge Fannie, Freddie to Write-Down Mortgages

  • November 24, 2011 at 11:17 am

    What policy is to forgive mortgage debt?
    You must pay the debt you owe, understood?

  • February 8, 2012 at 3:45 am

    This is definitely the right thing to do. it’s not an across the board solution, but for the right homeowner it’s a viable solution to curbing additional losses incurred by a home going into foreclosure. Obviously if the individual doesn’t qualify for a modification, they can always do the next best thing: Short sale. At least a short sale puts costs a bank less and doesn’t damage a neighborhood as badly as an abandoned home.

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