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FHFA rejects proposal for mortgage principal cuts

fannie freddie say no

fannie freddie say no

FHFA comes to a strong conclusion

Edward DeMarco, the acting chief of the Federal Housing Finance Agency (FHFA), and most powerful person in housing has said that Fannie Mae and Freddie Mac (both regulated by the FHFA) would not be participating in the Obama administration’s program to cut principal amounts for struggling homeowners. Combined, Fannie and Freddie have been given $188 billion by the American taxpayers, a sore spot for both sides of the aisle.

In a letter to the Senate Banking Committee, DeMarco said that he has put a considerable amount of thought to the matter, concluding that the principal reduction portion of the Home Affordable Modification Program, stating that it “would not make a meaningful improvement in reducing foreclosures in a cost-effective way for taxpayers.”

U.S. Treasury Secretary responds

U.S. Treasury Secretary Timothy Geithner responded to DeMarco, “I am concerned by your continued opposition to allowing Fannie Mae and Freddie Mac to use targeted principal reduction in their loan modification programs,” according to MarketWatch1.

Geithner’s disapproval of DeMarco’s decision is primarily his citing that Fannie and Freddie participating in the program could help roughly 50,000 homeowners and save the mortgage giants a combined $3.6 billion compared to other loan modification programs.

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“In view of the clear benefits that the use of principal reduction by [Fannie and Freddie] would have for homeowners, the housing market and taxpayers, I urge you to reconsider this decision,” Geithner said.

Continued disagreement over the matter

This back and forth on this topic is not new, particularly between these two individuals. DeMarco argues that borrowers who are paying their loans on time right now will be incentivized to feign delinquency so they may reduce their principle.

DeMarco noted that if 3,000 to 19,000 borrowers who are current on their mortgages opted into claiming inability to pay, it would immediately offset any taxpayer benefits the FHFA would see from participating in the Obama administration’s plan.

DeMarco again infers that streamlining the refinancing process and enhancing short sale procedures would be more effective means to help housing recover.

1 MarketWatch report

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Tara Steele is the News Director at The American Genius, covering entrepreneur, real estate, technology news and everything in between. If you'd like to reach Tara with a question, comment, press release or hot news tip, simply click the link below.

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