Principal Reduction: A Matter of Analysis or Ideology for DeMarco?

05/02/2012 By: Esther Cho 

Based on documents Reps. Elijah Cummings (D-Maryland.) and John Tierney (D-Massachusetts) received, FHFA Acting Director Edward DeMarco’s reason for not allowing principal reduction appears to be based on ideology, not analysis, according to a May 1 letter they wrote to the director.

The letter states beginning in 2009, Fannie Mae officials worked with Citibank to develop a “shared equity” principal reduction pilot program that was “suddenly suspended” in July 2010, which prompted Citibank officials to ask what changed at the “11th hour.”
In the letter, the representatives stated that on February 8, a former Fannie Mae employee informed them the pilot program on principal reduction was terminated by officials who were “philosophically opposed to writing down principal balances.”
“Fannie Mae officials strongly supported the concept of principal reduction and fully evaluated its risks and benefits as they obtained the necessary internal approvals to finalize the program,” the letter stated.
One of the benefits Fannie Mae officials determined from their analysis is that implementation of the program would cost about $1.7 million, while benefits could exceed $410 million, according to the letter.
Another conclusion from Fannie Mae cited in the letter is that underwater borrowers will perform better on a modification that provides equity, and re-default rates on loans with principal reduction are far below rates on loans with other modifications.

The representatives also stated that the wide range of internal documents show that “Fannie Mae officials conducted detailed, substantive analyses and concluded years ago that principal reduction programs have enormous potential to save U.S. taxpayers significant amounts of money.”
DeMarco has cited taxpayer losses as one of the reasons for not allowing principal reduction, and FHFA’s estimate is principal reduction will cost taxpayers $100 billion, in addition to the $180 billion rescuing the GSEs has cost already.
The representatives said they obtained some of documents directly from FHFA, and others from an independent source, who provided documents labeled “confidential,” “proprietary,” and “internal.”
In response to the letter, DeMarco wrote his own addressing the claims, in which he stated, “I wish to convey my disappointment with this letter, the failure to contact FHFA to address your concerns, and the release of selective elements of the proprietary and confidential materials you received.”
With his May 1 letter, DeMarco attached an agency letter released April 12, 2012, that was an earlier response to the representatives regarding FHFA’s analysis of principal forgiveness.
In the April letter, authored by General Counsel Alfred M. Pollard, it was explained that the pilot program in question on principal reduction, among others, “ended due to complex operational issues involving system changes, accounting considerations and the interest level of Fannie Mae’s partners.”
As for the motive behind DeMarco’s decision on principal reduction, the acting director said FHFA makes decisions based on the analysis of facts.
“The fact that FHFA continues to consider principal forgiveness alternatives, including recent HAMP program changes initiated by the Treasury Department, belies any ideological tilt on our part, but rather a strict analytical-based approach to gathering and evaluating data to determine what options best fit within the legal constraints that fall upon this agency as conservator for the Enterprises,” he said in Tuesday’s letter