New Stance on Forgiving Mortgages
This article was originally published by the New York Times on April 10, 2012.
WASHINGTON — The overseer of Fannie Mae and Freddie Mac on Tuesday opened the door to forgiving some mortgage debt of homeowners who owe more than their houses are worth, as the Obama administration has recently urged.
The acting director of the Federal Housing Finance Agency, Edward J. DeMarco, said that in some circumstances it might make economic sense for the government-run companies to reduce borrowers' mortgages, taking a hit to modify the loan but also making it less likely that a homeowner will default.
But in his speech at the Brookings Institution, Mr. DeMarco described as limited the benefits from principal reduction, saying it would hardly be a magic bullet for struggling homeowners and noting that it might carry significant costs for taxpayers. His comments left doubt about whether he would change his long-held stance against principal reduction.
"This is not about some huge difference-making program that will rescue the housing market," he said. "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."
In a new analysis cited by Mr. DeMarco, the F.H.F.A. found that reducing mortgage principal for about 691,000 eligible underwater homeowners would reduce Fannie and Freddie's losses by about $1.7 billion, compared with doing another form of loan modification. But the Treasury Department would pay out $3.8 billion in incentives for the principal reductions, meaning a $2.1 billion net loss for the taxpayer.
Mr. DeMarco warned that allowing principal reduction might encourage some homeowners to stop paying their mortgages for the assistance, increasing the costs of such a policy. Moreover, he cautioned that it would aid fewer than one in 10 of the 11 million homeowners who owe more than their house is worth.
Mr. DeMarco also raised the thorny issue of second liens on homes where the first lien — the mortgage — has been reduced. Housing finance experts have expressed concern that principal reduction would unfairly benefit the banks that own many of those second liens, with some calling for second liens to be wiped out if the first lien gets cut.
Still, his remarks raised speculation that the F.H.F.A. might change its rules to allow principal reduction on mortgages owned or guaranteed by Fannie and Freddie. The agency, which oversees the two mortgage finance giants, is expected to make a decision on principal reduction in the coming weeks.
For months, Mr. DeMarco has come under fire from the administration and Democrats for objecting to principal reductions for loans backed by Fannie and Freddie on the grounds that other programs aid homeowners while saving taxpayers money. Since the government takeover, the housing companies have received more than $170 billion in federal support.
But the administration says that principal reduction can save money by reducing the chance that homeowners who are deeply under water will eventually give up on their mortgages. Moreover, it could help keep families in their homes and stabilize the overall housing market, which remains a significant drag on the recovery.
"We think there is a set of cases where it is clearly in the interest of the taxpayer to do principal reduction," Timothy F. Geithner, the Treasury secretary, told a House subcommittee last month. "Where it makes sense, we should do it."
Democrats on Capitol Hill have slammed Mr. DeMarco while calling for principal write-downs. "It appears that your refusal to follow Congress's direction and allow principal reduction programs is based more on ideology and fear of political backlash than on a straightforward analysis of the interests of American taxpayers," Representative Elijah E. Cummings of Maryland and Representative John F. Tierney of Massachusetts wrote to Mr. DeMarco in a February letter.
Mr. DeMarco's resistance has also led to calls for the White House to replace him. (He is a civil servant, not an administration appointee.)
Economists have suggested that principal reductions, if granted judiciously to underwater homeowners, would help the economy. In a February white paper, the Federal Reserve supported principal reductions from the government-sponsored enterprises as one option for helping the housing market.
Mr. DeMarco's latest comments suggested that his stance might change, even though he talked down principal reduction and talked up the benefits of other F.H.F.A. policies for troubled homeowners, like letting homeowners delay mortgage payments, reducing their monthly mortgage costs or lowering their interest rates.
The analysis showing a cost to the taxpayer might not be an insurmountable barrier. If Fannie and Freddie allowed principal reduction, the Treasury Department would be taking losses. It is offering incentives to lenders using funds from the 2009 Troubled Asset Relief Program — and it has urged F.H.F.A. to change its rules.
"Today's analysis is a step in the right direction," said Senator Jeff Merkley, Democrat of Oregon, in a statement. "We moved mountains saving the major financial institutions in 2008 and 2009. It's now time to bring the same energy and conviction to restore health to our housing market and help families stay in their homes."