Dems push Fannie, Freddie regulator on mortgage write-downs

Congressional Democrats are expected to continue pushing a federal housing regulator to write down mortgage principal for government-backed loans if a settlement with banks doesn’t help out enough homeowners.

The federal government is “very close” to an agreement with mortgage servicers that could help about a million homeowners, Housing and Urban Development Secretary Shaun Donovan said this week.

The deal, which also includes states’ attorneys general, would require the nation’s five largest banks — Bank of America, JPMorgan Chase, Citigroup, Wells Fargo and Ally Financial — to spend upward of $25 billion to help borrowers caught up in so-called robo-signing practices where servicers signed-off on foreclosure paperwork without properly reviewing documents.

{mosads}While the settlement would offer about 1 million borrowers nationwide an average of $20,000 in principal reduction, it is unclear who would be eligible.

If the settlement doesn’t help homeowners who have loans with Fannie Mae and Freddie Mac, Democratic lawmakers will likely keep pressing the Federal Housing Finance Agency (FHFA), the overseer of the government-controlled mortgage giants, to provide homeowners with principal reductions on their mortgages, especially those who owe more than their houses are worth.

House Democratic aides couldn’t detail their next move because they don’t have the full details on who is included in the group of 1 million homeowners.

The Housing and Urban Development department didn’t respond to a request for an explanation of the matter.

Still, Donovan said he expects that the settlement will be “far and away the largest principal reduction of the crisis” and one that will provide a boost for the economy and the housing market.

“It would be a very important step, short of legislation, perhaps the most important step we can take in the short term to help the housing market,” Dononvan said of the long-awaited deal that has been in the works since fall 2010.

The deal, which could take several more weeks to complete, has been in flux for months. The Obama administration had initially hoped for a resolution by Christmas and then by the State of the Union address, which is set for Tuesday.

The White House wants all 50 states to sign on to a final deal but will probably fall short of that goal.

Rep. Elijah Cummings (D-Md.), ranking member of the House Oversight and Government Reform Committee along with other House and Senate Democrats have been pressing FHFA Acting Director Edward DeMarco to allow Fannie and Freddie to reduce mortgage principal.

DeMarco, who is opposed to the move, has said “the use of principal reduction within the context of a loan modification is not going to be the least-cost approach for the taxpayer.”

At the end of the third quarter, 10.7 million, or 22.1 percent, of all residential properties were in negative equity, down slightly from 10.9 million properties, or 22.5 percent in the April-June period, according to CoreLogic. 

Federal Reserve Chairman Ben Bernanke, in a white paper released Jan. 4, said it might be worth the expense to lose money now in an effort to shore up the books of the government-sponsored enterprises for the long term while helping the economic recovery accelerate.

The paper stated that “some actions that cause greater losses to be sustained by the GSEs in the near term might be in the interest of taxpayers to pursue if those actions result in a quicker and more vigorous economic recovery.”

In November 2008, at the height of the financial crisis, Bernanke urged the industry to reduce mortgage balances to help struggling homeowners keep their homes. 

At that time, Treasury Secretary Henry Paulson said cutting principal might be appropriate in some cases, but didn’t endorse the idea as a general approach.

“Financial institutions have the incentive to work something out and in some instances, it may be that they may come to the conclusion that it is less costly to write down principal than to go through a foreclosure,” Paulson said in a USA Today interview more than three years ago. 

Earlier this month, New York Fed President William Dudley called again for a targeted principal-reduction program to help homeowners who are making payments on their underwater mortgages stay current on their loans and avoid foreclosure. 

“It is admittedly challenging to predict how underwater borrowers will ultimately perform and this performance will be sensitive to the path of home prices,” he said in a Jan. 6 speech. 

“Nonetheless, analysis by my staff that looks at likely borrower behavior over an extended time horizon suggests that without a significant turnaround in home prices and employment, a substantial proportion of those loans that are deeply underwater will ultimately default — absent an earned principal reduction program.”

Tennessee Republican Sen. Bob Corker responded by saying “it is absolutely egregious that the Federal Reserve would insert itself in this manner and ask people in Tennessee who played by the rules to bail out reckless borrowers in other parts of the country.”

Corker said he is concerned that taxpayers will bear the burden of costs if mortgage giants Fannie and Freddie write down mortgage principal.

Although there are concerns about taxpayers’ costs, supporters such as Sen. Robert Menendez (D-N.J.) have said that forcing Fannie and Freddie to write down principal would mitigate taxpayer losses, reduce foreclosures and help stabilize home prices.

Meanwhile, House Minority Leader Nancy Pelosi (D-Calif.) threw her support behind the idea of principal write-downs this week. 

“I have always been one who said reduce the principal,” she said. “There are all kinds of ways that we could have reduced the principal and the interest payments,” Pelosi said Tuesday during an interview with Politico.

“To the extent that we did that we would take some of the upside when the market came back. The federal government would have part of the upside, and the owner would have part of the upside.”

Pelosi said Washington policymakers ultimately need to conduct “a tough-minded, cold-blooded analysis” to examine how well the nation’s lenders have responded to the foreclosure crisis, which still lingers even as Wall Street has rebounded from the recession.

“I’ve had people come to me and say, ‘My banker has said to me … you are more valuable to me in foreclosure,'” she said.

“It’s not just about people staying in their homes and the dignity of that. It’s also about what this means to our economy. Our economy is never going to be fully well until this happens.”

Asked about how well the Obama administration has responded to the housing crisis, Pelosi said, “Something could have been done sooner.”

Joining in that call the National Association of Realtors is urging lenders to take more aggressive steps to modify loans.

“Significantly reducing monthly mortgage payments will help more families remain current on their mortgage and allow them to remain in their home, reducing the impact of foreclosures on local home prices,” said NAR President Moe Veissi.

“Loan modifications and short sales help stabilize home values and neighborhoods, and limit the losses incurred by lenders, the federal government and taxpayers, which is good for everyone,” Veissi said.

Still, support for reducing mortgage balances is mixed and the practice remains largely untested.  

“Mortgage principal reductions (MPRs) are a bad idea if the goal is to reduce mortgage defaults,” Anthony Sanders, real estate professor at George Mason University, told The Hill.  

“First, there is no evidence that principal reduction reduces defaults, it only lowers the loss severity for lenders and investors,” he said. 

“Second, principal reductions are very expensive, particularly given their lack of usefulness in quelling the mortgage foreclosure crisis. Taxpayers would bear the cost,” he said. 

“If MPRs are part of the attorney general’s settlement, that would be an injustice toward banks, investors and Fannie Mae and Freddie Mac.” 

Mortgage Banking Association president and chief executive David Stevens also has said that principal reductions are “highly problematic.”