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Now that the agency overseeing Fannie Mae and Freddie Mac has revealed the reasoning behind its stubborn opposition to mortgage principal reduction, the problems with its argument are clear.
February 27 -
The Federal Housing Finance Agency offered more details Tuesday for how it plans to create a new infrastructure for the secondary mortgage market and reduce the role of Fannie Mae and Freddie Mac.
February 21
WASHINGTON — Federal Housing Finance Agency Acting Director Edward DeMarco continued to play defense Tuesday as senators grilled him over his unwillingness to let Fannie Mae and Freddie Mac forgive struggling homeowners' debt.
Testifying before the Senate Banking Committee, DeMarco was asked why his agency has been against pursuing principal reductions for borrowers who are stuck with underwater mortgages and have fallen behind on their payments.
"Why is it that you have taken the view that principal reduction is not within the domain of the possibility of what you can do under the law?" Sen. Robert Menendez, D-N.J. asked.
DeMarco denied ever having said that the agency didn't have the "legal authority" to reduce principal for borrowers, and emphasized that there was common ground in his goal to help troubled borrowers.
"There is much that we agree on, specifically in the context of your question," said DeMarco. "Foreclosure is the worst possible outcome in almost all instances. It is the most costly. It is the most devastating to the family. It is the most devastating to the neighborhood and surrounding community. We have a responsibility to make all current actions to find a remedy to a trouble borrower short of foreclosure because of all these costs."
The agency, DeMarco said, has taken more steps than the broader market place with actions under its servicing alignment initiative to reach out to borrowers as soon as they miss a payment in order to find out if there's a problem and come up with a quick solution to help prevent a family from having to foreclose on their home.
But DeMarco said principal reductions, which win significant media and policymaker attention, are only way to assist struggling borrowers through the Home Affordable Modification Program.
"The principal reduction alternative in the HAMP mod program is the fourth tool in how to provide assistance to a troubled borrower to make good on their mortgage," said DeMarco.
The three other tools include reducing interest rates, extending the term of the loan, and placing the underwater portion of the principal of the loan into forbearance.
"What FHFA has consistently found in its analysis is that the first three of the tools work better than the fourth one with regard to our fundamental mandate of conservator," said DeMarco.
But other government officials disagree.
Shaun Donovan, the secretary of the Department of Housing and Urban Development, testified in favor of further steps toward principal reduction.
"There is increasing data available, we believe, that shows that this principal reduction can be good, not only for homeowners and communities, but for investors as well," said Donovan. "I do think that given the scale of the housing declines that we saw across the country, we're in a little bit uncharted territory in terms of what this means. It's one of the reasons why the settlement we think is important, because it can establish a track record for principal reduction."
State attorneys general reached a $25 billion settlement with the five major servicers earlier this month, which could result in nearly $35 billion in principal reductions, according to the housing secretary. Donovan said final details of the settlement are expected to be filed in court this week.
Sen. Bob Corker, D-Tenn. cited just how tough the recent criticism has been on DeMarco.
"What's it like to be out there a person, who basically is there to serve the taxpayers -- has done a good job at doing that and is trying to move things ahead and have people up here criticize you when they themselves don't have the courage, the will, the desire to address these issues?" said Corker.
DeMarco replied: "There's a lot of conflict in this job, and a lot of balancing. Yes, you are correct senator, there appears to be a lot of criticism."
He also got some support from Sen. Patrick Toomey, R-Penn., who inquired whether pursuing such a principal reduction program would create a disparity for those borrowers who are paying on time and potentially create an incentive for homeowners to stop making payments on time.
"One of the under-reported things here is that while this country has many borrowers with that are mortgages underwater the vast majority of them are making their payment every month, and they must wonder about some of these discussions we're having," said DeMarco.
