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Ed DeMarco, the regulator of Fannie Mae and Freddie Mac signaled Tuesday that the Federal Housing Finance Agency is unlikely to pursue a broad principal forgiveness program.
April 10 -
Democrats on the Senate Banking Committee hope to make it easier for homeowners with Fannie and Freddie mortgages to refinance.
April 2 -
The Obama administration wants the agency to give more consideration of tool meant to help troubled borrowers keep their homes.
March 21
LOS ANGELES - Edward DeMarco, the acting director of the Federal Housing Finance Agency, said Thursday he is “deeply concerned” about underwater borrowers, but said that forbearance plans and short sales already serve as forms of principal reduction without saddling taxpayers with further losses.
DeMarco said he would provide a final answer this month on whether Fannie Mae and Freddie Mac would agree to principal reductions as part of a Treasury Department proposal that would use funds from the Troubled Asset Relief Program.
“We are evaluating the Treasury’s offer, which is basically taking money out of the TARP program to give to Fannie and Freddie for principal forgiveness to reduce a portion of the losses,” DeMarco told a group of about 100 housing counselors and bankers attending a conference at the Federal Reserve here. “But the cost to the taxpayer shows up on a different account.”
DeMarco reiterated his reservations about reducing principal.
“We have 2 million homeowners that are deeply underwater on their mortgage but are making their mortgage payment on time every month, and that is a huge risk to the taxpayer and I’m deeply concerned about it,” he said.
The FHFA, which oversees Fannie and Freddie, has not engaged in principal reductions as one of the tools of loss mitigation in assisting borrowers. Members of the Obama administration and Congressional Democrats have criticized DeMarco and the agency for that stance, saying they are not doing enough to reduce foreclosures.
On Thursday, DeMarco said that modifications of loans insured by Fannie and Freddie typically involve some form of principal forbearance, in which a portion of the principal balance is set aside with no interest charges, and a new loan is created at a lower interest rate, reducing the borrower’s payment.
“It is all about getting a balance to give the borrower an affordable payment to stay in the home, but also protecting the taxpayer, including all the neighbors that have lost a lot of home equity,” he said.
DeMarco said there was not reason to immediately reduce principal, particularly if housing prices rebound.
For borrowers that sell their homes in short sales, a portion of the underlying principal is forgiven outright, which equates to another form of principal reduction, he said.
