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Originally published Tuesday, May 1, 2012 at 6:14 PM

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Fannie Mae backed plan to cut loan principal; program canceled

Fannie Mae officials in 2009 supported principal reductions for underwater homeowners and crafted a pilot program that would have cost only $1.7 million to implement but could have provided more than $410 million worth of benefits, according to internal company documents cited by two House Democrats, who concluded Fannie regulator Edward DeMarco scuttled a pilot program for ideological reasons.

Los Angeles Times

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WASHINGTON — Pressure is mounting on a key federal regulator to allow mortgage giants Fannie Mae and Freddie Mac to reduce loan principal amounts for struggling homeowners, after disclosures that a plan to do just that was scuttled even though it was aimed at saving taxpayer money and healing the housing market.

Fannie Mae officials in 2009 supported reductions in some cases and crafted a pilot program that would have cost only $1.7 million to implement but could have provided more than $410 million worth of benefits to homeowners, according to internal company documents cited by two House Democrats.

But the pilot program set to start a year later was abruptly canceled, apparently for ideological reasons, Reps. Elijah Cummings, D-Md., and John Tierney, D-Mass., said in a letter Tuesday to the acting director of the Federal Housing Finance Agency (FHFA).

Edward DeMarco, the acting director, has resisted a push by the White House, Democrats, housing advocates and state attorneys general to implement a principal reduction program at Fannie and Freddie.

The FHFA has overseen the giant mortgage-financing companies, which own or back 60 percent of the nation's home loans, since they were seized by the federal government in 2008 as they bordered on bankruptcy. Taxpayers have provided $188 billion to keep them afloat.

"This just adds to the pile of evidence that calls into question how sincere DeMarco is about treating this issue seriously," said Ian Kim, director of campaigns for Rebuild the Dream, an advocacy group urging a principal-reduction program.

Supporters of principal reduction argue it would reduce foreclosures by lowering the monthly payments for underwater homeowners and giving them hope they would one day have equity in their homes.

Opponents counter that reducing the principal on mortgages owned or backed by Fannie and Freddie could increase their losses and encourage homeowners who are making payments to fall behind in order to lower their debt.

The new documents contradict DeMarco's congressional testimony in November that analyses by Fannie and Freddie concluded other forms of homeowner assistance were less costly to taxpayers, the lawmakers said.

The documents show that Fannie "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," Cummings and Tierney wrote to DeMarco.

The documents indicated that more than half of Fannie's customers, many of whom were underwater on their loans, could have been helped by reduced principals, the letter said. Fewer would have defaulted on loans, saving taxpayer bailout funds and reducing downward pressure on home prices.

The failure to launch a reduction program "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," the lawmakers said.

DeMarco said he was disappointed by the letter and that he had provided information about the pilot program to the lawmakers April 12.

"I strongly disagree with any characterization of FHFA's work or motives as anything but in keeping with the professionalism expected of this agency," DeMarco said. Pilot programs were developed but "at the end of the day there was not full agreement to proceed," he said.

DeMarco has argued there are less costly ways to assist distressed homeowners and that the FHFA must protect the taxpayer money pumped into Fannie and Freddie.

But amid growing calls for him to resign or be fired, DeMarco has been conducting a new analysis based on increased Treasury Department incentives for principal reductions.

He said Tuesday "the fact that FHFA continues to consider principal forgiveness alternatives ... belies any ideological tilt on our part."

Last month, DeMarco said that preliminary findings showed Fannie and Freddie could save $1.7 billion by reducing principal for some homeowners. But he cautioned that such a program would not solve the housing market's problems and indicated the agency would make a decision by the end of April.

An FHFA spokeswoman said Tuesday that the agency was still working on its analysis and was in discussions with Treasury Department officials.

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