Smart Borrower Blog

FHFA Shows Little Sign of Allowing Mortgage Principal Write-downs


Feb 29th, 2012 @ 3:04 PM by Amber Nelson


The Federal Housing Finance Agency, the regulator for mortgage giants Fannie Mae and Freddie Mac, does not seem interested in taking up the Obama Administration up on its proposal to allow the two companies to write-down loan balances for struggling homeowners.

In a hearing Tuesday before U.S. senators, FHFA acting director Edward DeMarco continued to stick to his guns that principal write-downs are not “in the best interest of the companies.” Fannie and Freddie currently back about 60 percent of all existing mortgages and 75 percent of all new mortgages and have been under government conservatorship since the fall of 2008 when they almost collapsed.

Since Fannie and Freddie have already drained $183 billion in taxpayer funds since being rescued (and Fannie Mae just asked for another $4.6 billion this week), DeMarco has been very careful to reduce the risks to both companies’ financial balance sheets.

“Foreclosure is the worst possible outcome in most instances. It is the most costly, it is the most devastating to the family, and it is the most devastating to the neighborhood,” DeMarco admitted to the Senate Banking Committee as quoted in the LA Times.

But he suggested that plenty of other options could be more effective in preventing foreclosure than principal write-downs. He mentioned lowering interest rates, reducing monthly payments, and modifying the length of loans.

DeMarco said that three out of every four Fannie and Freddie underwater borrowers (those who owe more than their homes are worth) are still keeping up with their mortgage payments.

“These borrowers are demonstrating a continued willingness to meet their mortgage obligation,” Mr. DeMarco said at a public forum as quoted in a Wall Street Journal article.“This should be recognized and encouraged — not dampened with incentives for people to not continue paying.”

His approach is obviously leaving plenty of Democrats upset. At the Tuesday hearing, Senator Robert Menendez (D- N.J.) said,

“In my view, the FHFA has shown a dismal lack of initiative in the housing crisis and needs to be far more aggressive in taking steps that can help both homeowners and taxpayers.”

 

About Amber Nelson
Amber Nelson is a seasoned mortgage industry writer and a regular contributor to Loan.com and Mortgage101.com.

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