U.S. Treasury Secretary Timothy F. Geithner, twice rebuffed, is vowing to try a third time to persuade the Federal Housing Finance Agency to allow principal forgiveness on mortgages backed by Fannie Mae (FNMA) and Freddie Mac. (FMCC)
“I urge you to reconsider this decision,” Geithner wrote to FHFA Acting Director Edward J. DeMarco, who yesterday announced that Treasury Department financial incentives would not be enough to make it financially worthwhile for the two taxpayer-owned companies to write down debt on troubled loans.
DeMarco’s decision came three months after an April speech in which he signaled that he believed the technique would not work and could encourage additional defaults. Geithner yesterday offered technical assistance should DeMarco change his mind.
“Treasury stands ready to provide any additional analytical support to make a targeted principal reduction program at the GSEs successful,” he wrote to DeMarco.
DeMarco yesterday made it clear that he doesn’t plan to change his mind, a decision hailed by housing analysts as good for the market.
“This should be positive for housing by taking off the table the threat of a wave of defaults by borrowers looking to get principal reduction,” Jaret Seiberg, senior policy analyst at Guggenheim Partners, wrote in a note to investors.
Months of analysis showed there would be no clear benefit to taxpayers if the Federal Housing Finance Agency changed its policy barring the government-owned mortgage-finance companies from loan modifications including debt writedowns, DeMarco said at a briefing with reporters in Washington yesterday.
“We concluded the potential benefit was too small and uncertain relative to unknown costs and risks,” DeMarco said.
Under Pressure
The decision follows months of pressure to reverse the policy from activist groups and congressional Democrats, who touted it as a way to keep more families from losing their homes to foreclosure. FHFA has been in talks since January with Treasury officials, who offered Fannie Mae and Freddie Mac as much as 63 cents for each dollar of principal reduction, using unspent funds from the Troubled Asset Relief Program.
DeMarco released a detailed analysis showing that under most scenarios, even while there might be a net benefit to the government-sponsored enterprises, taxpayers would lose money because they would be funding the program through the Treasury.
DeMarco’s stand and Geithner’s response reflect tension between FHFA, an independent agency, and President Barack Obama’s Democratic administration, which has pushed to expand aid for more than 11 million borrowers who owe more than their homes are worth in the wake of the 2008 credit crisis.
Limited Success
The administration has had limited success in spurring loan modifications through an overlapping set of programs. Although the administration originally sought to assist about 9 million borrowers, the two main federal programs have reached by 2.2 million.
In his letter, Geithner argued that writedowns would extend relief to more homeowners.
“I do not believe it is the best decision for the country,” Geithner wrote. “The use of targeted principal reductions by the GSEs would provide much-needed help to a significant number of troubled homeowners.”
Republican lawmakers praised DeMarco for resisting such pressure.
“The administration put incredible political pressure on Director DeMarco, and he deserves praise for standing up for the best interests of the American people,” said RepresentativeSpencer Bachus, an Alabama Republican and chairman of the House Financial Services Committee. “The administration’s foreclosure mitigation plans have not and do not work.”
Yesterday’s announcement underscored DeMarco’s reputation for independence, said Tim Rood, managing director of the Collingwood Group, a Washington-based consulting firm.
“You’ve got to give the guy credit for being a steward of the taxpayer dollars, and he should be a shining example for other politicians,” Rood said in a telephone interview. “The best decision is not always the easiest decision.”
Investors Pleased
DeMarco drew praise from investor and banking groups, who said debt writedowns would make lenders more reluctant to provide credit to borrowers who show default risk, and scorn from homeowner advocates, some of whom called for his firing.
“It is incomprehensible that Mr. DeMarco would reject the chance to save up to a billion dollars in taxpayer funds while helping nearly half a million homeowners,” said Representative Elijah E. Cummings, a Maryland Democrat on the House Oversight and Government Reform Committee. “He should immediately withdraw this reckless and misguided letter.”
Julian Mann, who helps oversee $5.94 billion in bonds as a vice president at Los Angeles-based First Pacific Advisors LLC, said he was pleased.
“DeMarco is doing the right thing, looking after the taxpayer and recognizing that these measures don’t perceptibly move the needle when trying to floor the housing market,” Mann said. “It’s a relief both as an investor and as a homeowner.”
Gaining Popularity
Principal writedowns are gaining popularity in modifications of loans backed by lenders and private investors. About 10 percent of such modifications now involve writedowns, according to data from the Office of the Comptroller of the Currency.
The technique may work better for private investors because they can choose which loans are eligible, an almost impossible task for Fannie Mae and Freddie Mac, who are dealing with more than 1,000 different loan servicers, DeMarco said.
Fannie Mae, based in Washington, and Freddie Mac of McLean,Virginia, have drawn almost $190 billion in Treasury aid since they were taken under U.S. conservatorship in 2008 amid loan losses that pushed them to the brink of insolvency.
The analysis, which builds on a study FHFA released in April, looked at the costs and benefits of reducing principal on troubled loans under different scenarios, including how many eligible borrowers would participate and the ratio of their debt to income. In addition, DeMarco said, the administrative costs of the program could reach $90 million.
Encouraging Defaults
Like previous FHFA analyses, the most recent data predicted that loan forgiveness would create new costs for the taxpayer-funded firms by encouraging defaults among borrowers who have kept making payments even though they owe more than their homes are worth. Three out of every four so-called underwater borrowers with GSE loans are current.
Fannie Mae and Freddie Mac have completed 1.1 million loan modifications since the end of 2008 and have engaged in more than 1 million other transactions to avert foreclosures, including short sales or repayment plans.
Fannie Mae’s 3 percent, 30-year securities rose 0.18 percent to 104.09 cents on the dollar as of 4:46 p.m. in New York, according to data compiled by Bloomberg.
To contact the reporter on this story: Clea Benson in Washington at [email protected]
To contact the editor responsible for this story:Maura Reynolds at [email protected]