From the latimes.com:
WASHINGTON — After a lengthy review, a key federal regulator said Tuesday he would not allow Fannie Mae and Freddie Mac to lower the amount some underwater homeowners owe on their mortgages despite new financial incentives from the Obama administration.
Detailed analysis has determined that principal reductions would cost taxpayers money and would not clearly improve the ability of homeowners to avoid foreclosure, said Edward DeMarco, acting director of the Federal Housing Finance Agency. The agency oversees Fannie Mae and Freddie Mac, the housing finance giants that were seized by the government in 2008 as they teetered on the brink of failure.
The Obama administration, Democratic officials and housing advocates have been pressuring DeMarco to allow Fannie and Freddie to lower the principal for underwater homeowners as a way of reducing foreclosures. Fannie and Freddie own or back about 60% of all mortgages. Some, including California Atty. Gen. Kamala Harris, have called for Obama to fire DeMarco because of his refusal to allow Fannie and Freddie to reduce principal.
But DeMarco has steadfastly refused out of concern that it would increase the cost of the taxpayer bailouts of Fannie and Freddie. As of June 20, taxpayers have pumped $188 billion into the two companies to keep them afloat. The companies have paid about $46 billion in dividends back to the Treasury Department in exchange for that assistance, leaving taxpayers on the hook for about $42 billion.
The FHFA has been reconsidering the position because of new Treasury incentives tripling the amount of money offered to owners of mortgages to do principal reductions.
But DeMarco said those incentives were still taxpayer money and did not offset the potential harm from a principal reduction program. He said such a program could encourage underwater homeowners who are making their payments to stop so they could qualify for a principal reduction. The FHFA analysis found that it would take just 3,000 to 19,000 borrowers out of 1.4 million underwater borrowers to offset any potential positives to the bottom-line of Fannie and Freddie from principal reductions.
“We weighed these potential benefits and costs, recognizing the inherent uncertainties associated with these estimates … and we concluded that the potential benefit was too small and uncertain relative to known and unknown costs and risks to warrant Fannie and Freddie” offering principal reductions, DeMarco told reporters.
He stressed that Fannie and Freddie offer an array of programs to help struggling homeowners, including those that lower monthly payments.
Treasury Secretary Timothy F. Geithner wrote to DeMarco on Tuesday asking him to reconsider his position.
“Five years into the housing crisis, millions of homeowners are still struggling to stay in their homes and the legacy of the crisis continues to weigh on the market,” Geithner said. “You have the power to help more struggling homeowners and help heal the remaining damage from the housing crisis.”
I got a nickel that says this will boost the number REO’s that will hit the market later this year.
Well unless this guy gets fired anyway.
So either DeMarco is using his authority as leverage to get what he wants (e.g. a nice, cush appointment somewhere) or DeMarco is genuinely doing the right thing.
I really hope they do not go through with these principal reductions. The free cheese is really getting out of control.
Nice to see (for once) that sanity prevails. I’m no Obama basher, but this marks a high point since the bailout frenzy began.
Imagine that! actually protecting taxpayer money. Seems DeMarco has a soul after all?
Now, just watch… as soon as I write this, a secret wire transfer is going to his Cayman Islands account to “change his mind”.
He’ll be fired soon.
Wow, data/fact driven decision making. Never thought I would live to see the day. Of course, the pie-in-the-sky, childish, emotion driven policy to hand out principal reductions like candy will ultimately be implemented by DeMarco’s successor, since Ed’s days are obviously numbered. Way to go Ed. The private (real world) awaits…
More politicians should realize that the majority of Americans support ending the taxpayer subsidies of Fannie/Freddie.
Instead, they will allow Ed to be villanized, and run out of town.
The FHFA analysis found that it would take just 3,000 to 19,000 borrowers out of 1.4 million underwater borrowers to offset any potential positives to the bottom-line of Fannie and Freddie from principal reductions.
(does Timmay think 3,000-19,000 is worth it, or does his analysis say different? We will probably never know)
Ed’s conclusion (from link):
Existing Enterprise loss mitigation efforts provide opportunities for all types of underwater borrowers.
For borrowers who have the ability and willingness to pay there is HARP, which as the result of recent changes has been helping an increasing number of underwater borrowers.
For borrowers who do not have the ability but do have the willingness to pay, both HAMP and the Enterprises’ proprietary modifications provide at least as much monthly payment relief as HAMP PRA.
Finally, for borrowers who do not have the ability or willingness to pay, the Enterprises’ foreclosure alternatives, either through short sales or deed-in-lieu of foreclosure, provide an opportunity to exit their home without the harm to their credit standing that foreclosure produces.
In terms of the Enterprises’ adopting HAMP PRA, once the impact of strategic modifiers and the operational costs and complexity of implementing HAMP PRA were fully considered, the results of the model-driven analysis were insufficient to warrant the Enterprises participation in HAMP PRA.
Both Fannie Mae and Freddie Mac conducted their own analysis of principal forgiveness, and that analysis is also being released by FHFA. The results are similar to those described above and in the appendix.