WASHINGTON (Reuters) - The regulator for Fannie Mae FNMA.OB and Freddie Mac FMCC.OB told lawmakers that forcing the two mortgage firms to write down loan principal would require more than $100 billion in fresh taxpayer funds.
In a letter sent on Friday to the Republican and Democratic leaders of a U.S. House of Representatives government oversight panel, the Federal Housing Finance Agency explained why it has long opposed principal reductions for borrowers who owe more than their homes are worth.
It said it had determined that such reductions would be more costly for the two firms than allowing those troubled borrowers to default.
The regulator has been under pressure from Democrats to permit the write-down of principal by the two government-controlled mortgage finance providers as a way to help some of the millions of U.S. homeowners who are “underwater.”
Representative Elijah Cummings of Maryland, the top Democrat on the Oversight and Government Reform Committee, has pushed the housing regulator to explain its thinking in deciding not to offer principal reductions.
FHFA, however, has maintained widespread principal forgiveness would undercut the finances of Fannie and Freddie, which have already received about $169 billion in taxpayer aid. Republicans have supported FHFA’s decision.
“FHFA has a statutory responsibility as conservator to preserve and conserve the assets and property of the regulated entities,” FHFA’s acting director, Edward DeMarco, wrote in the letter to lawmakers dated January 20.
The Obama administration wants to secure widespread principle reductions in a legal settlement between the government and some of the biggest mortgage servicers that is aimed at cleaning up alleged foreclosure abuses.
About 22 percent of U.S. homes have negative equity totaling about $750 billion, according to CoreLogic.
“Given that any money spent on this endeavor would ultimately come from taxpayers and given that our analysis does not indicate a preservation of assets for Fannie Mae and Freddie Mac substantial enough to offset costs, an expenditure of this nature at this time would, in my judgment, require congressional action,” DeMarco said in the letter.
Fannie Mae and Freddie Mac were taken over by the government in 2008 as mortgage losses mounted. Millions of soured loans issued during the housing bubble remain on their books and delinquencies on those loans continue to rise.
Fannie Mae and Freddie Mac own or guarantee roughly half of all outstanding mortgages in the United States. Out of the approximate 30 million mortgages guaranteed by the two firms, close to 3 million of those loans were held by underwater borrowers as of last summer, according to analysis provided in the letter.
Another barrier to principal writedowns, aside from pushing losses at the two firms even further, DeMarco said, was the costs associated with new technology and training to servicers that would be needed to launch a program that offers principal forgiveness.
FHFA told lawmakers that forbearance, which allows the borrower to reduce or suspend payments on a loan for a specific amount of time, is a less costly option. Principal forbearance limits accounting losses and allows Fannie and Freddie to recoup the principal at some later point, according to the letter.
The housing regulator also assured lawmakers that FHFA remains committed to helping borrowers to stay in their homes and will continue to work on such principal forbearance plans and government initiatives to modify or refinance loans.
The Federal Reserve, in a white paper to Congress earlier this month, said writedowns “had the potential to decrease the probability of default” and “improve migration between labor markets.”
However, the Fed stopped short of endorsing such an initiative and noted concern that writing down loan balances would create a moral hazard - the concept that rescue efforts breed further behavior that exacerbates the existing problem - and could prompt other borrowers to stop making timely loan payments.
(Reporting By Margaret Chadbourn)
This story was corrected to substitute 7th paragraph quote. The original was a summary of the question posed to the FHFA and was used in error