Fannie Mae (FNMA:US) and Freddie Mac won’t forgive principal on delinquent mortgages they guarantee even as the U.S. Treasury Department is offering incentive payments for writedowns, the companies’ regulator said today.
Months of analysis showed there would be no clear benefit to taxpayers if the Federal Housing Finance Agency were to change its longstanding policy barring the government-owned mortgage-finance companies from loan modifications that include debt writedowns, Edward J. DeMarco, the agency’s acting director, said today said at a briefing with reporters.
“We concluded the potential benefit was too small and uncertain relative to unknown costs and risks,” DeMarco said.
The decision comes after months of mounting 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 discussions since January with Treasury officials, who offered Fannie Mae and Freddie Mac (FMCC:US) as much as 63 cents for each dollar of principal reduction, using unspent funds from the Troubled Asset Relief Program.
Treasury Secretary Timothy F. Geithner criticized the decision today in a letter to DeMarco.
“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.”
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.
Fannie Mae and Freddie Mac have together drawn almost $190 billion in Treasury aid since they were taken under U.S. conservatorship in 2008 when they were on the brink of insolvency due to investments in risky loans.
“It is our concern, not just how does this affect the enterprises, but we also have a responsibility to assess how does this affect the taxpayer,” DeMarco said.
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 owe more than their homes are worth but who have kept making payments anyway. Three out of every four 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.
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