In a letter to Rep. Elijah Cummings, D-Md., the ranking member of the House Committee on Oversight and Government Reform, DeMarco explained the situation stems from the problems that government-sponsored enterprises (GSEs) face in dealing with a glut of underwater mortgages.
‘Putting this determination in context, as of June 30, 2011, the enterprises had nearly 3 million first lien mortgages with outstanding balances estimated to be greater than the value of the home, as measured using FHFA's House Price Index,’ DeMarco wrote. ‘FHFA estimates that principal forgiveness for all of these mortgages would require funding of almost $100 billion to pay down mortgages to the value of the homes securing them. This would be in addition to the credit losses both enterprises are currently experiencing.
‘Another factor to consider is that nearly 80 percent of enterprise underwater borrowers were current on their mortgages as of June 30, 2011,’ DeMarco continued. ‘Even for more deeply underwater borrowers – those with mark-to-market loan-to-value (LTV) ratios above 115 percent – 74 percent are current. This trend contrasts with non-enterprise loans, where many underwater borrowers are delinquent.’
DeMarco acknowledged that the U.S. taxpayers would ultimately pay the bill because the GSEs lacked the assets to offset the costs of forgiving this level of debt.
‘While it is not in the best interests of taxpayers for FHFA to require the enterprises to offer principal forgiveness to high-LTV borrowers, a principal forgiveness strategy might reduce losses for other loan holders,’ DeMarco added ‘Indeed, in several of the examples cited, such as Ocwen and Wells Fargo, principal forgiveness is being offered to borrowers whose loans the investor or servicer purchased at a discount, which would likely change the analytics significantly. Also, because of enterprise requirements for credit enhancement of high LTV loans, a high percentage of enterprise loans have mortgage insurance or second liens. Consequently, a large share of the potential gains from principal forgiveness on enterprise loans would go to unrelated beneficiaries than may be the case for forgiveness on non-enterprise loans.’