FHFA Says Fannie, Freddie Will Not Reduce Mortgage Balances

The Federal Housing Finance Agency announced Tuesday that after several months of mounting pressure from the Obama administrator and lawmakers that the mortgage giants it regulates, Fannie Mae and Freddie Mac, will not lower the mortgage principal of underwater home owners. Its decision quickly drew criticism. 

The FHFA insists that through its own analysis it has concluded that reducing the mortgage principal of struggling home owners will not help prevent foreclosures nor save taxpayers money in bailout money to the GSEs (Government-sponsored enterprise). 

The government rescued Fannie and Freddie in September 2008 to cover losses on soured mortgage loans. Since then the FHFA, which is independent of the administration, has controlled their financial decisions.

U.S. taxpayers have spent roughly $170 billion to rescue the companies. It could cost roughly $260 billion more to support them through 2014 after subtracting dividend payments, according to the government.

The Obama administration says it disagrees with the FHFA’s decision. Treasury Secretary Tim Geithner was quick to argue that a reduction of struggling borrowers’ loan balances by the FHFA could save taxpayers up to $1 billion. 

"I do not believe it is the best decision for the country," Geithner wrote to the FHFA shortly after it announced its decision. "You have the power to help more struggling home owners and help heal the remaining damage from the housing crisis."

The government had committed to helping to cover some of the costs to implementing such a program if the FHFA would permit mortgage principal reductions to move forward. The Treasury Department said in January that it would cover part of the cost if Fannie and Freddie could reduce principal when they modify mortgages for troubled borrowers. The department said it would use unspent housing rescue money from the $700 billion Troubled Asset Relief Program, or TARP.

Yet, Edward DeMarco, the FHFA’s acting director, says that the FHFA has concluded after months of consideration that “the anticipated benefits do not outweigh the costs and risks” with mortgage principal reductions, and that the agency stands by its original decision to not permit it. DeMarco says that only about 74,000 to 248,000 home owners would be eligible for the principal reductions, but developing and implementing such a program would prove costly. Plus, about 11 million Americans are underwater on their mortgages so the program would only be able to help a small share. 

DeMarco also said he was concerned reducing the mortgage principal on some home owners’ mortgages would prompt other borrowers to fall behind on their payments so that they could receive similar treatment.

Source: “Fannie, Freddie Regulator Says No to Reducing Principal,” CNNMoney and “Agency Bars Fannie and Freddie From Reducing Principal,” The Associated Press