Pressure Mounts on Fannie, Freddie to Write Down Mortgages

Pressure is intensifying on the regulator that controls the two mortgage financing giants Fannie Mae and Freddie Mac to get on board an effort by the Obama Administration to reduce the mortgage principals of “underwater” homeowners.
In recent days, top U.S. officials, homeowner advocates, and even the state attorney general of California – a key figure in the recent $25 billion mortgage settlement with top lenders – is pushing Edward DeMarco, chief of Fannie and Freddie’s regulator, to reconsider a staunch opposition to principal write-downs.
DeMarco heads the Federal Housing Finance Authority, which has controlled Fannie and Freddie since the height of the financial crisis. The two companies own about half of all U.S. mortgages.
DeMarco has stood by his contention that any benefits to write-downs on Fannie and Freddie mortgages would be outweighed by the cost to taxpayers. Fannie and Freddie have tapped into quarterly bailouts from the U.S. Treasury totaling nearly $170 billion.
However, Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development, told the Wall Street Journal that Fannie and Freddie write-downs amount to “an important piece of the puzzle” toward easing the housing/foreclosure crisis.
White House officials recently said it would triple incentive payments under an existing loan-modification program that subsidizes the cost of loan forgiveness – and that it would offer them to Fannie and Freddie if the Federal Housing Finance Authority goes along.
“More and more economists across the political spectrum are recognizing [principal reduction] is a critical step,” Donovan said in an interview with The Wall Street Journal. “If a family is in their home for 10, 15 years and has no hope of being able to build equity again, they’re going to give up at some point.
Last week, a coalition of more than 200 civil rights groups sent DeMarco a letter, asking him to do more to reduce foreclosures, especially principal write-downs.
Recently, Kamala Harris, the California attorney general, renewed her call for DeMarco to resign because of his stance against principal reductions.
“If Mr. DeMarco is unwilling to support principal reduction for these home loans in crisis, he should step aside for someone who will,” Harris has said.
Representing one of the states hardest hit by the foreclosure crisis, Harris was a key player in the “robo-signing” mortgage settlement announced last week. It was finalized after 14 months of contentious talks, during which Harris was a holdout at various times because she felt the top lenders would not do enough to compensate homeowners.
Only a relatively small portion of U.S. homeowners, about 1 in 10, potentially qualify for relief under the terms of the settlement. Mortgages held by Fannie and Freddie are not included in the deal.
On Feb. 10, Kelli Parsons, senior vice president and chief communications officer for Fannie Mae, released a statement on principal reduction pilot programs.
“We have found that there are a number of challenges with principal reduction efforts, including significant technological and systems complexity and substantial cost without proven effectiveness,” Parsons said. “The conclusion was that the size of the borrower’s monthly payment is what matters most and that forbearance is a more cost effective way to reduce a borrower’s monthly payment.”
But economists and housing market experts say principal write-downs are the most effective tool for helping homeowners who are underwater on their mortgages – or owing more than their homes are worth.
About $300 billion of the Fannie and Freddie loan portfolio is at least 15 percent underwater.  It is estimated that has much as one-third of U.S. homeowners are underwater on their mortgages.

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