Will Fannie and Freddie Forgive Billions in Mortgage Debt?

Both Fannie Mae and Freddie Mac have concluded that giving homeowners a big break on their mortgages would make good financial sense in many cases, NPR and ProPublica have learned, which means the two most powerful entities in the housing market may soon be doing business a little differently.

Principal write-downs allow for a portion of a loan to be forgiven for someone who’s having trouble making payments. Democrats favor such a change, while most Republicans are opposed, but it’s a key federal regulator that is blocking Fannie and Freddie from adopting the approach.

Some economists and many Democratic lawmakers consider principal reductions as a means of aiding the housing market. Financial executives at Fannie and Freddie have made presentations to their regulator in recent days trying to convince them that reductions for many homeowners would prevent larger losses and keep people in their homes.

Fannie and Freddie guarantee and control most of the home loans in the United States. According to Mark Zandi, chief economist of Moody’s Analytics, if Fannie and Freddie “fully committed to the idea of doing more principal reduction [modifications],” several hundred thousand write-offs would likely be made over the course of the next several years. “And that would make a substantive difference,” said Zandi.

But while Zandi says hundreds of thousands of mortgage write-offs could do a lot to tip the housing market toward recovery, other economists disagree, and Fannie and Freddie’s regulator has so far refused to allow this approach. Ed DeMarco, head of the Federal Housing Finance Agency, has controlled Fannie and Freddie since they were bailed out by the federal government. While DeMarco has said he wants to prevent foreclosures, he believes “we need to do so in a way that we are meeting our mandate to protect the taxpayers.”

DeMarco said both Fannie and Freddie told him they didn’t support principal reductions, but it seems they’ve since changed their tune, most likely because the Obama administration recently tripled the incentives offered to lenders to do these principal write-downs. With the new program, a lender forgiving $50,000 in mortgage debt will be reimburse $25,000 by the federal government, which means taxpayers will be left footing the bill.

Furthermore, many economists worry that consumers who are perfectly able to make their mortgage payments will stop doing so in order to get a principal reduction, which could create a cataclysmic mess. But the private sector has already jumped on the write-down bandwagon — roughly 15 percent of all recent loan modifications were down by private lenders.

For now, DeMarco says his agency is reconsidering its prior analysis of principal reduction. Meanwhile, political pressure is building, with more than 100 lawmakers having already signed a letter asking him to allow principal reduction.

To contact the reporter on this story: Emily Knapp at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com