Tensions Escalate as DeMarco, Geithner Argue Merits of Principal Reduction

Edward J. DeMarco, Acting Director of the Federal Housing Finance Agency today again stated his opposition to allowing Fannie Mae and Freddie Mac to participate in the Principal Reduction Alternative (PRA) of the Home Affordable Modification Program (HAMP).  DeMarco's agency which acts as conservator for the two government sponsored enterprises (GSEs) has opposed principal reduction on the part of the two companies despite growing pressure from Congress and the Department of the Treasury.

In a letter to the Chair and Ranking Member of the Senate Committee on Banking, Housing, and Urban Affairs DeMarco rebuffed an offer to use funds from the Toxic Asset Relief Program (TARP) to assist borrowers and said, "After much study, I have concluded the Fannie Mae and Freddie Mac's adoption of HAMP PRA would not make a meaningful improvement in reducing foreclosures in a cost effective way for taxpayers."  He went on to say there are continued improvements that can be made to the GSEs loss mitigation and borrower assistance efforts, specifically naming the further streamlining of refinance opportunities, enhancing the short sale process, and reducing lender uncertainty that could inhibit new lending.

Treasury Secretary Timothy Geithner told DeMarco in a letter released to the media that he was concerned about the regulator's continued opposition and urged the acting director to reconsider his decision.   The Secretary said "I do not believe it is the best decision for the country because, as we have discussed many times, the use of targeted principal reduction by the GSEs would provide much needed help to a significant number of troubled homeowners, help repair the nation's housing market, and result in a net benefit to taxpayers.

Geithner called FHFA's numbers "selective" and said that the agency's own analysis which it had shared with Treasury "has shown that permitting the GSE's to participate in the program could help up to half a million homeowners and save the GSEs $3.6 billion compared to standard loan modifications.  GSE participation, he said, would save taxpayers as much as $1 billion on a net basis. 

Geithner's letter was accompanied by a five page memorandum in which Treasury staff lays out their case for principal reduction.

There has been increasing friction between the Obama Administration and DeMarco over his handling of the conservatorships.  DeMarco, a holdover from the Bush Administration, has been acting director since 2009 because the Senate refused to bring the current president's nominee to the floor for a vote.  Administration insiders have blamed DeMarco for thwarting many of the president's housing initiatives and there has been a spate of on-line petitions organized by progressive political groups calling for DeMarco's resignation.

In his letter DeMarco restated his conviction that principal reduction would not support his agency's prime obligation as conservator; to preserve the assets of the GSEs on behalf of taxpayers.  He said that the result of adopting the HAMP PRA for the GSEs could result in benefits that could be either positive or negative for taxpayers but any model-projected benefits could be offset by a number of costs and risks including the implementation costs for the GSEs and the servicers, opportunity costs, long term implications of weakening the reliability of the mortgage contract, and delayed resolution of ongoing modification negotiations.

Tomorrow we will take a detailed look at the justifications laid out by DeMarco and Geithner for their differing viewpoints and no doubt here reactions from the administration and members of Congress. 

From: Edward DeMarco
To: Tim Johnson and Richard Shelby
View Letter

From: Tim Geithner
To: Edward DeMarco
View Letter