Pressure Mounts On DeMarco Over Principal Reductions

Pressure Mounts On DeMarco Over Principal Reductions Edward DeMarco, acting director of the Federal Housing Finance Agency (FHFA), has come under more pressure to reverse his agency's policy against principal reductions on underwater mortgages.

Massachusetts Attorney General Martha Coakley is leading a coalition of 10 states in urging the FHFA to allow Fannie Mae and Freddie Mac to allow principal reductions. In a letter to DeMarco, Coakley claimed that principal reduction would help the economy without introducing risks to the government-sponsored enterprises (GSEs).

‘The financial stability of Fannie Mae and Freddie Mac will not be harmed if they engage in principal forgiveness, and according to new data, [the GSEs] could save close to $1.7 billion,’ Coakley wrote. ‘We will soon see the results of the country's largest banks implementing principal loan reduction as required under the recent multistate servicing settlement. It is now time for the FHFA to accept the fact that principal forgiveness programs help borrowers, help communities and can improve the creditors' bottom line.’

Coakley added that there was no data to support the view that forgiveness conflicts with the goal of GSE asset preservation. She added that the increase of incentive payments to investors for allowing forgiveness under the Home Affordable Modification Program should also reduce concerns regarding the potential impact on the financial stability of Fannie Mae and Freddie Mac as either owner or guarantor of these loans.

‘More than 5 million people have lost their homes due to foreclosure in the past five years, with millions more on the brink of foreclosure,’ she added. ‘Effectively resolving this foreclosure crisis is a key to restoring a healthy economy for our entire country. Because Fannie Mae and Freddie Mac own a majority of the nation's home loans, they must be a leader in the arena of loan modification best practices, and not an obstruction.’

Separately, the head of the International Monetary Fund (IMF) weighed in on the subject. The Washington Post reports that Christine Lagarde, in an address yesterday before the Brookings Institution in Washington, D.C., urged the FHFA to enact principal reductions.

‘Fannie and Freddie have to be part of the equation,’ Lagarde said. ‘U.S. households have to be able to unload a bit.’

However, the leader of a credit union industry trade group urged DeMarco to consider a the risk for new problems should the GSEs allow principal reductions. Bill Cheney, president and CEO of the Credit Union National Association (CUNA), sent a letter to DeMarco that warned of possible spillover effects into the private sector.

‘Specifically, CUNA is concerned that if FHFA were to implement a principal forgiveness program, some (or many) of the underwater borrowers without enterprise-backed mortgages would seek similar principal forgiveness packages from their lenders or servicers,’ Cheney wrote. ‘CUNA shares FHFA's concerns regarding the possibility that such a program would incentivize borrowers to strategically default in order to obtain principal forgiveness.

‘However,’ Cheney added, ‘since many borrowers do not know whether their loans are enterprise-backed, an FHFA program may have a domino effect leading to strategic defaults outside of the body of mortgages backed by the enterprises. These borrowers may not find out whether their loans are eligible for an FHFA principal forgiveness package until well after they have defaulted, which could potentially force a private lender into agreeing to forgive principal – even though such lender would technically not be subject to FHFA's program. Additionally, borrowers without enterprise-backed mortgages that have not defaulted may pursue principal forgiveness from their lenders simply because their neighbor benefited from the FHFA program.’


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