Principal Reduction Conflict Escalates Between Congress, FHFA

Two Democratic members of the House Committee on Oversight and Government Reform fired another salvo in their continuing battle with Federal Housing Finance Agency Acting Director Edward J. DeMarco over the value of principal reduction in modifying GSE loans and, within hours DeMarco fired back.   Representatives Elijah Cummings and John F. Tierney say they have obtained a "wide range of internal documents" from Fannie Mae that contradict DeMarco's congressional testimony on the matter.

At issue is the stated policy of FHFA that forbearance of principal is preferable to a permanent forgiveness of principal in modifying loans belonging to or guaranteed by Fannie Mae and Freddie Mac, the government sponsored enterprises under FHFA conservatorship.  Both the Treasury Department and Democratic members of Congress have been pressuring FHFA to allow principal reduction, a process that is used in modifications of non-GSE loans under the Home Affordable Modification Program (HAMP.)

The two Congressmen sent a letter to DeMarco today, citing the Fannie Mae documents and requesting direct interviews with Fannie Mae officials whose names appear in the documents, as well as all drafts of DeMarco's previous responses to Congress.

According to Cummings office, the documents show that Fannie Mae officials concluded as far back as 2009 that reducing principal on its mortgages could save taxpayer money by avoiding foreclosures.  DeMarco testified before the Oversight Committee in November 2011 that that he had examined data and analyses from Fannie Mae and Freddie Mac and concluded that principal reduction "is not going to be the least-cost approach for the taxpayer."  DeMarco has also made several recent speeches reported by MND amplifying on his contention that forbearance is a preferable approach as it allows the government to preserve the potential upside of the loan.

In a letter to DeMarco the two said, "Contrary to your testimony, we have now obtained a wide range of internal documents demonstrating that Fannie Mae officials conducted detailed, substantive analyses and concluded years ago that principal reduction programs have enormous potential to save U.S. taxpayers significant amounts of money by reducing overall losses from foreclosures following default."

The Congressmen obtained documents from a former Fannie official labeled "confidential," "proprietary," and "internal" that they claim DeMarco has been withholding from Congress.  They also obtained additional documents from DeMarco in response to a request they first made last November.

Cummings' and Tierney's letter contends that the internal documents describe nearly a year of work by Fannie Mae and Citibank to develop a "shared equity" pilot program to prevent foreclosures, avoid losses to U.S. taxpayers, help the overall housing market, and mitigate the risk of "moral hazard" by requiring homeowners to share part of any future appreciation with the government.  The program was apparently terminated in July 2010 due to unspecified "operational" challenges.

"Based on the documents we have obtained, it appears that the shared equity principal reduction pilot program should have been implemented years ago, and the failure to do so may have resulted in unnecessary losses to U.S. taxpayers," the letter said.   "This was not merely a missed opportunity, but a conscious choice that appears to have been based on ideology rather than Fannie Mae's own data and analyses."

DeMarco responded Tuesday afternoon saying that he strongly disagreed with any characterization of FHFA's work or motives as anything but professional and that his agency had endeavored to provide responses to the Congressmen's requests in a timely fashion. 

DeMarco noted that, since 2009, FHFA has approved multiple pilot programs to look into various alternatives to principal forgiveness and that such approvals should refute any claim of a pre-determined view on his part as should the fact that FHFA continues to consider principal forgiveness alternatives including recent changes to the HAMP program initiated by the Treasury Department.   He described the pilot programs as reflecting an open and robust interest in this topic, enthusiasm for meeting the goals of finding a workable approach...and adherence to review of ideas from all sides.'  Pilot programs by their nature are experimental, he said, and go through discussion and review prior to deployment and then must be reviewed prior to any full implementation of a broad program.  "At the corporate level, taking into account staff perspectives and experience, the pilots were not pursued or were terminated."  He said that operational concerns were a key determining factor in not pursuing or ending the pilot programs.

DeMarco concluded,  "I believe we agree on two important points:  FHFA has a duty to ensure the Enterprises provide assistance to troubled homeowners and FHFA has a duty to conserve the assets and property of the Enterprises so as to protect taxpayers.  How best to accomplish these separate goals, especially in light of the uncertainties associated with initiating a principal forgiveness program is a challenging policy question.  Such a policy question, especially as it has to do with public funds being taken from one group of citizens to provide a benefit to another group of citizens, should be determined by Congress.  In the absence of clear legislative direction, however, FHFA will continue to make determinations in how best to accomplish both of these goals after careful analysis of the facts and other information available to us and the multiple legal responsibilities placed upon us."