FHFA Postpones Decision on Principal Reduction

WASHINGTON — The Federal Housing Finance Agency has indefinitely delayed its timeline for a highly anticipated decision on whether to allow principal reductions on loans owned by Fannie Mae and Freddie Mac, an agency spokeswoman said Friday.

The agency had previously said it would announce its determination by the end of the month, but is now no longer expected to do so.

"FHFA continues to work on its principal forgiveness analysis and is in discussions with the Department of the Treasury," a spokeswoman for the agency said Friday. "A final determination on the Treasury proposal for triple investor incentives for Hamp Principal Reduction Alternative is being deferred until we conclude these activities."

The agency did not specify a new target date for its decision.

Principal reductions have emerged as a crucial issue in efforts to work out troubled loans threatened by foreclosure. An array of experts and officials have cited research showing write-downs as perhaps the only broad-based way to resolve bad credits short of mass foreclosures. But the government-sponsored enterprises, as well as others in the industry, have resisted such reductions.

The acting director of the FHFA, Edward DeMarco, has been under immense pressure by the administration and lawmakers to allow Fannie and Freddie to wash away portions of homeowners' mortgages that are currently underwater in order to prevent foreclosures.

The Treasury Department in January asked the agency to reexamine its position on forgiving struggling borrowers' mortgages based on a new set of incentives included under the Obama administration's revamped Home Affordable Modification Program.

With an upcoming election, the White House hopes significant changes to the program will allow at least a million more borrowers to refinance their home to reduce their monthly payments.

Meanwhile, Rep. Elijah Cummings, D-Md., ranking member of the House Oversight Government Reform Committee, has gone so far as to suggest that DeMarco should resign. He has also been pressing the FHFA to complete an information request by the committee this month. Documents were due at the end of the February, but the FHFA has asked for more time to complete the request.

For now, DeMarco has stood by the agency's initial analysis, arguing principal reduction would not provide greater benefits than principal forbearance - a tool the agency has already been using.

"For many underwater borrowers, we achieve this by forbearing on principal — that is, charging a zero rate of interest on the forbearance amount and deferring its repayment," said DeMarco in a recent speech. "This focus on making the monthly mortgage payment affordable is an efficient way to provide assistance to the borrower and keep them in their home."

FHFA currently uses several tools to help borrowers prevent foreclosure including reducing interest rates, extending the term of the loan, and placing the underwater portion of the principal of the loan into forbearance.

DeMarco has also repeatedly tried to make the case that he has dueling priorities — one of which is to protect the taxpayer from any future losses.

Most observers have suspected that Fannie and Freddie will wind up doing more principal write-downs, but will likely be fairly modest in both size and scope.

But such confidence has waned in recent weeks following comments made by DeMarco.

"This is not about some huge difference-making program that will rescue the housing market," said DeMarco, in a recent speech before the Brookings Institute, a non-partisan think tank. "It is a debate about which tools, at the margin, better balance two goals: maximizing assistance to several hundred thousand homeowners while minimizing further cost to all other homeowners and taxpayers."

Separately, DeMarco has been equally worried of creating a moral hazard by incentivizing homeowners who are current with their mortgages to default in order to tap into the government's program. Three out of four deeply underwater borrowers in Fannie and Freddie's book of business are current on their loans.