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Fannie Mae and Freddie Mac are opting not to forgive a portion of the principal on delinquent mortgage loans they guarantee, the company’s regulator announced on Tuesday. The mortgage servicers’ longstanding decision to opt out of loan forgiveness programs will continue, despite the U.S. Treasury Department’s offer to provide incentive payments for writedowns.
Fannie Mae and Freddie Mac Reject Loan Forgiveness
After conducting months of analysis, the Federal Housing Finance Agency (FHFA), which regulates both Fannie Mae and Freddie Mac, determined that the two government-owned mortgage-finance companies will continue to be barred from offering loan modifications, as announced by Edward J. DeMarco, the agency’s acting director.
The decision came after facing months of pressure from activist groups and congressional Democrats to reverse the existing policy. Opponents of the decision said offering mortgage loan writedowns would keep more families from losing their homes to foreclosure.
To encourage the FHFA to change its rules on loan forgiveness programs, the U.S. Treasury Department offered Fannie and Freddie as much as 63 cents for each dollar of principal reduction, money that would come from unspent funds from the Troubled Asset Relief Program (TARP).
But DeMarco said in his announcement that “the potential benefit was too small and uncertain relative to unknown costs and risks.”
Loan Forgiveness Programs Costly for Taxpayers
The primary reason the FHFA rejected the idea of loan forgiveness programs is due to the debt that would mount for taxpayers, DeMarco said. He released an analysis of the decision that showed, under most scenarios, taxpayers would lose money because the program would be funded through the Treasury.
Fannie Mae and Freddie Mac have drawn nearly $190 billion in combined Treasury aid since they were taken under U.S. conservatorship in 2008. DeMarco explained that the regulator has a responsibility to assess how added assistance would affect taxpayers.
Treasury Secretary Timothy F. Geithner criticized DeMarco’s decision to uphold the FHFA’s current policy on loan forgiveness.
“I do not believe it is the best decision for the country,” he wrote. “The use of targeted principal reductions by the GSE’s would provide much-needed help to a significant number of troubled homeowners.”
