Pressure Grows on Fannie and Freddie to Cut Principal on Loans
California’s attorney general, Kamala D. Harris, has ratcheted up the pressure on Fannie Mae and Freddie Mac to allow debt reduction on their home loans by asking the mortgage finance giants to halt foreclosures in the state.
In a letter to Edward J. DeMarco, the regulator who controls Fannie and Freddie, Ms. Harris asked that foreclosures be suspended until his agency, the Federal Housing Finance Agency, completes a promised review of its policy forbidding debt reduction for delinquent homeowners who owe more than their home is worth.
Her letter, which was sent on Friday and disclosed on Monday, requests “a thorough, transparent analysis of whether principal reduction is in the best interest of struggling homeowners as well as taxpayers.”
Mr. DeMarco has come under increasing pressure to allow debt forgiveness, also called principal reduction, since the announcement of a multibillion-dollar foreclosure abuse settlement that requires banks to write down mortgage debt for some eligible homeowners. Loans backed by Fannie and Freddie — more than half of all outstanding mortgage loans — are not eligible for relief under the settlement.
The two officials have been at odds on how to handle the mortgage crisis. Ms. Harris has suggested that Mr. DeMarco should resign because he was not doing enough to help the housing market recover. She has also sued Fannie and Freddie in an attempt to force them to answer questions about their foreclosure policies. About 80,000 Fannie and Freddie loans in California are in the process of foreclosure, according to an estimate by the attorney general’s office.
Martha Coakley, the attorney general of Massachusetts, has also asked Mr. DeMarco to allow debt reduction, as have some housing analysts, who say that debt reduction is the surest way to prevent foreclosure.
Mr. DeMarco has resisted principal reduction, saying it would cost taxpayerstoo much.
Proponents of debt forgiveness note that roughly one out of five Americans owes more on a home than it is worth, and that negative equity totals almost $700 billion. Reducing some of that debt will save families’ homes and save lenders money, they say, by reducing the number of foreclosures. In California, banks agreed to give $12 billion in debt reduction under the settlement, and the architects of the settlement hope that will pry open the spigot of debt reduction, which banks have been reluctant to do on a large scale.
“I know this effort will confirm what many economists have already concluded: principal reduction plans are the most helpful form of loss mitigation for homeowners and the most cost-effective for investors when compared to foreclosures,” Ms. Harris wrote.
For his part, Mr. DeMarco has said that while debt forgiveness would save taxpayers money in the long run by preventing foreclosures, it would not save as much as another type of loan modification called forbearance. With forbearance, a portion of the debt is suspended until the end of the mortgage term or until the house is sold. The homeowner’s payments are reduced but he does not regain an ownership stake in the home.
A recent letter to Mr. DeMarco from two Democratic members of the House Committee on Oversight and Government Reform took issue with his reasoning. It said that using the Federal Housing Finance Agency’s own analysis, principal reduction of Fannie Mae loans would save taxpayers more money than forbearance. It also questioned the assumptions underlying the agency’s calculations.
A spokeswoman for the finance agency said it had sent a response to Ms. Harris’s letter.
Mr. DeMarco has left the door open to allowing debt reduction, and recently the Treasury Department tripled its incentives to lenders to do principal reduction under its Home Affordable Modification Program, commonly referred to as HAMP, and offered them to Fannie and Freddie for the first time. The Federal Housing Finance Agency has said that it would review the new incentives.