From the latimes.com:
Reporting from Washington—
The regulator over Fannie Mae and Freddie Mac pushed back against mounting pressure that the mortgage finance giants start reducing the principal owed on troubled loans, insisting the practice could hurt taxpayers and that alternatives were better at avoiding foreclosures.
Edward J. DeMarco, acting director of the Federal Housing Finance Agency, told U.S. senators Tuesday that reducing the principal on mortgages owned or guaranteed by Fannie and Freddie would not protect taxpayers.
The government has pumped about $183 billion in taxpayer money into the companies, which the agency seized in 2008 as they teetered on the brink of bankruptcy.
Lawmakers, especially Democrats, have maintained that the agency needed to direct Fannie and Freddie to write down the mortgage principal on loans that exceeded the value of homes when struggling borrowers were facing foreclosures.
Five of the nation’s major banks agreed to similar terms to settle a nationwide lawsuit. Fannie and Freddie, which own or guarantee 60% of existing mortgages and back 75% of all new mortgages, was not part of that lawsuit.
DeMarco said executives at Fannie and Freddie advised him that it wasn’t “in the best interest of the companies” to write down mortgage principal to reduce foreclosures. The companies would lose part of the total amounts lent out.
He touted other steps, such as interest rate reductions that Fannie and Freddie have approved, to help keep struggling homeowners from defaulting.
“Foreclosure is the worst possible outcome in most instances. It is the most costly, it is the most devastating to the family, and it is the most devastating to the neighborhood,” DeMarco told the Senate Banking Committee.
The agency has “a responsibility to find all prudent actions” to prevent foreclosures, he said. Refinancing, modifying the lengths of loans and deferring payments on mortgage principal are more effective at keeping people in their homes without increasing the risk of losses at Fannie and Freddie, DeMarco said.
Democrats argued that principal reductions would help stabilize the housing market, ultimately reducing taxpayer losses on the Fannie and Freddie bailout because mortgages would not end up in foreclosures.
“In my view, the FHFA has shown a dismal lack of initiative in the housing crisis and needs to be far more aggressive in taking steps that can help both homeowners and taxpayers,” said Sen. Robert Menendez (D-N.J.).
“The banks are finding it profitable to give principal reductions to about 20% of their own loans while, ironically, the government isn’t allowing principal reductions on any loans,” he said.
Housing and Urban Development Secretary Shaun Donovan said that principal reduction was the one foreclosure-prevention tool that the administration has made the least progress in employing.
But FHFA is an independent agency. DeMarco had been chief operating officer at the agency and became acting director in 2009. The White House has tried to replace him, but Senate Republicans blocked confirmation of President Obama’s nominee for the job.
Republicans, who oppose more government intervention in the housing market, praised DeMarco. But he acknowledged that “there appears to be a lot of criticism” of his performance.
California Atty. Gen. Kamala D. Harris has called on DeMarco to resign.
In a letter released Monday, she asked him to freeze foreclosures in the state until the agency did a “thorough, transparent analysis of whether principal reduction is in the best interests of struggling homeowners as well as taxpayers.”
Also Monday, 115 House members wrote to DeMarco to urge him to allow Fannie and Freddie to write down loan principals.
I don’t know how Kamala can expect to conduct a “thorough, transparent analysis” when principal-reduction recipients have only been in testing for a year or two.
I’m sure the recipients will say that it feels good so far, but to prove that principal reductions actually benefit taxpayers would take years of trials.
And this old wife’s tale keeps appearing in mainline thoughts of decision makers, which is sad that they are so ignorant:
“Foreclosure is the worst possible outcome in most instances. It is the most costly, it is the most devastating to the family, and it is the most devastating to the neighborhood,” DeMarco told the Senate Banking Committee.
The worst possible outcome for neighborhoods is letting people live for free in limboland. Once they get foreclosed, the neighborhood benefits greatly from a new, responsible owner taking over and improving the property.
P.S. I’m feeling better today, thanks everyone!
“worst possible outcome”… holy crap, what are these people smoking? I can only assume that this is what happens when you give an idiot a checkbook with an overdrawn, bottomless bank account.
I’m all for giving people the ultimate in principal write-downs… foreclosure.
It seems that our Senate Banking Committee are too stupid to realize that foreclosure IS a principal write-down.
Chuck
Update on houses discussed here recently:
1. Canyon Craftsman did go pending – waiting for Auntie’s comments 😆
2. $1.45 Derby Hill house on Heather Ridge received three offers, and is going pending today.
http://www.redfin.com/CA/San-Diego/10792-Heather-Ridge-Dr-92130/home/17205614
3. Del Mar Heights REO on Minorca – remodeled but freeway noise – has no offers yet.
4. Drew Brees’ house has been for sale since August, 2010 – went pending yesterday:
http://www.redfin.com/CA/San-Diego/14185-Caminito-Vistana-92130/home/6314230
5. The fourth house on Great Meadow in the $1.2-range went pending yesterday:
http://www.redfin.com/CA/San-Diego/5120-Great-Meadow-Dr-92130/home/17205611
6. Lavender REO ended up with five offers, sold over list price.
I disagree with principal write downs funded by the taxpayer, although I’m perfectly fine with private companies and parties agreeing to principal writedowns if that makes the most sense. It happens all the time in commercial real estate.
There might be something to be said for principal writedowns in the sense that the current owner in an auction setting is very likely to be the one to offer the highest price for the property assuming they have income to support it. In that case you might say a current owner would be willing to stay even if you don’t fully reduce principal to market prices. I.e. somebody 30% underwater that is written down to 10-15% underwater might just stick it out while a foreclosure will go at market prices if it’s honest.
Figures that DeMarco would get criticism, since he’s one of the few that appears to be actually concerned about taxpayer’s money.
In cases where a strong argument can be made that lenders and their appraisers knew or should have known that the values of properties being purchased or borrowed against by naive customers could not be expected to secure the amounts being borrowed but chose to make the loans anyway, then reducing principle and charging it to the lenders and their stockholders could be considered a logical consequence of agreeing to secure a loan with that property. Otherwise, the homeowners need to decide whether they want their homes enough to continue to pay underwater loans or turn in their keys and get on with their lives. Taxpayer involvement should be limited to helping borrowers who have not defaulted refinance at current rates.
Totally agree with Jim…freeloading homeowners are the worst for everyone. Our condo complex has an “owner” who hasn’t made a payment since Dec. 2008 and paid no HOA dues since then. Over 3 YEARS of free rent and maintenance!
Dog barks all night, trash in their front yard, broken windows, yet there is nothing we neighbors can do about it. Thanks Bank of America.