House Dems Not Backing Down On Principal Reductions

House Dems Not Backing Down On Principal Reductions BLOG VIEW: This week, House Democrats continued their full-court press against the Federal Housing Finance Agency's (FHFA) anti-principal-reduction policies, with the party's House Oversight Committee members imploring Acting Director Ed DeMarco to produce evidence that such a strategy runs counter to the FHFA's conservatorship goals for Fannie and Freddie.

On Wednesday, the panel's Democrats wrote to DeMarco requesting specific information as to why principal writedowns have yet to be incorporated into the government-sponsored enterprises' suite of foreclosure-prevention measures. The lawmakers' request followed up on a line of questioning from Rep. John Tierney, D-Mass. (pictured left), to DeMarco during a Nov. 16 committee hearing.

Reiterating his long-held stance that the FHFA does not have the statutory authority to permit writedowns, DeMarco told Tierney at the time that he did not believe the FHFA had been appropriated taxpayer funds for the purpose of supporting the housing market as a whole.

‘We have been through the analytics of the underwater borrowers at Fannie and Freddie and looked at the foreclosure alternative programs that are available, Mr. Tierney, and we have concluded that the use of a principal reduction within the context of a loan modification is not going to be the least-cost approach,’ DeMarco said.

Tierney forged ahead in his line of questioning, suggesting the FHFA was lagging behind the aggressive loan modification activities of the private sector. In particular, he cited Ocwen Financial Corp.'s Shared Appreciation Modification program, which allows for mortgages to be written down to 95% of the home's current market value.

‘Now, they're not doing that to be nice – you know that,’ Tierney told DeMarco, referring to Ocwen. ‘It's in their financial self-interest, and I still don't think you've made a compelling argument why it's not in Fannie Mae, Freddie Mac and the taxpayers' financial self-interest to do that.’

Tierney requested that DeMarco provide the committee with the specific statutory provision that DeMarco believes prevents the FHFA from allowing Fannie and Freddie to reduce principal balances. He also asked DeMarco to share with the committee the FHFA's analysis of principal-reduction programs.

The Democrats' again pressed for those details in their letter Wednesday. They asked that DeMarco respond back by Dec. 9.

‘Even though commercial banks have implemented their own principal reduction programs, FHFA stubbornly continues to favor massive waves of foreclosures,’ Rep. Elijah Cummings, ranking minority member of the House Oversight Committee, said in a statement. ‘It's high time to see the actual data and analyses behind this policy, and to work towards new approaches that finally put American homeowners and our nation's economy first.’

During the Nov. 16 hearing, Tierney read quotations from several leading economists and analysts, including Federal Reserve Chairman Ben Bernanke and Neil Barofsky (former special inspector general for the Troubled Asset Relief Program), that indicated the government should employ principal reductions to combat the pervasive problem of negative equity.

The Democrats included a slew of like quotes in their press statement Wednesday, including this one from Martin S. Feldstein, a former economic advisor to President Reagan: ‘To halt the fall in house prices, the government should reduce mortgage principal when it exceeds 110 percent of the home value.’

Wednesday's letter represents only the latest in a long series of attempts by House Democrats – those on the Oversight Committee in particular – to get DeMarco on board with the principal-reduction concept.

In October, DeMarco appeared to have sent a mixed message to the committee. After a meeting with DeMarco in which the lawmakers offered a principal-paydown proposal from Rep. Zoe Lofgren, D-Calif., the Democrats released a statement with this seemingly inconceivable headline: ‘FHFA Director Praises Principal Paydown Plan as 'Promising' and 'Credible.'’

Days later, hopes were apparently dashed when DeMarco told C-SPAN that principal forgiveness, on its own, ‘doesn't accomplish our conservator mandate relative to the loan modification tools and techniques that we have in place right now.’

DeMarco is feeling the pressure on principal reductions elsewhere, too. Last week, a group of 20 House Democrats joined together to express their dismay that the FHFA hasn't adopted writedowns.

‘[W]e strongly urge that you reconsider your refusal to allow principal reductions to achieve better-performing modifications and avoid the extreme losses of unnecessary foreclosures, and that FHFA consider only the eventual costs to taxpayers of the conservatorship, not the illusory accounting treatment that now appears to guide FHFA's modifications,’ they wrote, referring to an explanation DeMarco gave back in March. At that time, DeMarco had told lawmakers that the costs of reducing principal balances include immediate losses that would have to be realized on otherwise performing loans.

Along with their letter, the 20 Democrats last week sent DeMarco a care package that included ‘The Case for Principal Reductions’ (a study by Amherst Securities Group's Laurie Goodman) and a study by researchers at the New York Federal Reserve. Both studies found that principal reductions equate to better-performing loan modifications.

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