After a lengthy review, a key federal regulator said Tuesday he would not allow Fannie Mae and Freddie Mac to lower the amount some underwater homeowners owe on their mortgages despite new financial incentives from the Obama administration.
Detailed analysis has determined that principal reductions would cost taxpayers money and would not clearly improve the ability of homeowners to avoid foreclosure, said Edward DeMarco, acting director of the Federal Housing Finance Agency. The agency oversees Fannie Mae and Freddie Mac, the housing finance giants that were seized by the government in 2008 as they teetered on the brink of failure.
The decision could have a big impact in Stanislaus County, where more than half of all homeowners are underwater on their mortgages, owing more than the homes are worth.
Isabel Duran, a housing credit counselor with Clearpoint Credit Counseling Solutions, which has offices throughout the Central Valley, said the concept of principal reduction is an attractive one to many homeowners, but is available to few.
"This does make it more difficult," Duran said. "But it's not a devastating loss, because people can apply for other modifications and workouts. It's just that, darn, this was such a good idea. This just makes it harder."
The Obama administration, Democratic officials and housing advocates have been pressuring DeMarco to allow Fannie and Freddie to lower the principal for underwater homeowners as a way of reducing foreclosures. Fannie and Freddie own or back about 60 percent of all mortgages. Some people, including California Attorney General Kamala Harris, have called for Obama to fire DeMarco because of his refusal to let Fannie and Freddie reduce principal.
But DeMarco has steadfastly refused out of concern that it would increase the cost of the taxpayer bailouts of Fannie and Freddie. As of June 20, taxpayers have pumped $188 billion into the two companies to keep them afloat. The companies have paid about $46 billion in dividends back to the Treasury Department in exchange for that assistance, leaving taxpayers on the hook for about $42 billion.
The FHFA has been reconsidering the position because of new Treasury incentives that triple the amount of money offered to owners of mortgages to do principal reductions.
But DeMarco said those incentives still were taxpayer money and did not offset the potential harm from a principal reduction program. He said such a program could encourage underwater homeowners who are making their payments to stop so they could qualify for a principal reduction. The FHFA analysis found that it would take 3,000 to 19,000 borrowers out of 1.4 million underwater borrowers to offset any potential positives to the bottom-line of Fannie and Freddie from principal reductions.
Uncertainties remain
"We weighed these potential benefits and costs, recognizing the inherent uncertainties associated with these estimates ... and we concluded that the potential benefit was too small and uncertain relative to known and unknown costs and risks to warrant Fannie and Freddie" offering principal reductions, DeMarco said.
He stressed that Fannie and Freddie offer an array of programs to help struggling homeowners, including those who lower monthly payments.
Duran with Clearpoint Credit Counseling said that in California, some homeowners had been eligible through the Keep Your Home California organization. The program, which started more than a year ago, works with about 10 lenders in the state who offer principal reduction. That number has dropped, however, from about 65 who were offering the option at its peak.
Other options
But Duran said options are available to homeowners in the state looking for help. "It's kind of sad because everyone's hopes were raised that there might be more principal reductions offered," she said. "But there are still other options like payment plans, workout solutions, modifications, forbearance."
Treasury Secretary Timothy Geithner wrote to DeMarco on Tuesday asking him to reconsider his position.
"Five years into the housing crisis, millions of homeowners are still struggling to stay in their homes and the legacy of the crisis continues to weigh on the market," Geithner said. "You have the power to help more struggling homeowners and help heal the remaining damage from the housing crisis."
Bee staff writer Marijke Rowland contributed to this report.
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