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DeMarco: principal forgiveness is the wrong solution, risky

As federal agencies issue release after release on the topic of principal forgiveness, each pushing their opinion, housing remains broken in many peoples’ eyes, and DeMarco addresses how he feels the focus on the write-offs is misplaced.

FHFA director speaks on next steps

This morning, at the Brookings Institute1, Edward DeMarco, acting director of the Federal Housing Finance Agency (FHFA) spoke2 on the issues surrounding Fannie Mae and Freddie Mac which is under the conservatorship of the FHFA. DeMarco addressed the flocks of homeowners that are struggling with paying their mortgage, and says that supporting those homeowners is the current objective of FHFA, Fannie and Freddie.

DeMarco said, “As FHFA makes its decision on whether the Enterprises should offer principal forgiveness with the HAMP triple incentives, we will look to the issues I have described: the NPV impact; borrower incentive effects; and operational costs. Those are the issues that are within our responsibilities as conservator of the Enterprises.”

The principal reduction controversy

Shaun Donovan, the United States Secretary of Housing and Urban Development, which operates under the FHFA said in an interview over the weekend that granting principal reductions is “the right decision for homeowners and for the taxpayer.”

The FHFA says it would cost taxpayers $100 billion to grant principal reductions, while Fannie and Freddie say it would save taxpayers $150 billion. Neither appears to be compromising on their positions on the topic of write-downs.

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DeMarco addressed the division between all of the agencies. “Whether Fannie Mae or Freddie Mac forgive principal or not, the universe of Enterprise borrowers potentially eligible for a HAMP PRA is well less than one million households, a fraction of the estimated 11 million underwater borrowers in the country today. This is not about some huge difference-making program that will rescue the housing market.”

DeMarco continued, “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. The anticipated benefit of principal forgiveness is that, by reducing foreclosures relative to other modification types, Enterprise losses would be lowered and house prices would stabilize faster, thereby producing broader benefits to all market participants.”

The risks of principal reduction

The greater contingent risk, according to DeMarco, is the larger group of underwater homeowners who have “remained faithful to paying their mortgage obligations” and that encouraging their continued success could have a more broad impact on the recovering of housing, more so than debating “which modification approach offered to troubled borrowers is preferable.”

DeMarco notes that a key risk in forgiving debts of delinquent borrowers is the incentive for some to cease paying in search of principal forgiveness modification.

In the coming weeks, the agencies are expected to come to a consensus on next steps, but for now, as each leader give a speech, the fight appears more polarized than ever.

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1 DeMarco’s audio speech
2 DeMarco’s prepared speech

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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