If DeMarco's out, is principal reduction in?

A change at the top of the FHFA could mean a change in the policy that has barred cutting the balance of Fannie- or Freddie-backed loans.

By Teresa at MSN Real Estate Dec 11, 2012 7:02AM

House in stormy water (© Steven Puetzer/Getty Images)It seems likely that Edward DeMarco, the interim overseer of Fannie Mae and Freddie Mac, is on his way out.


The Wall Street Journal reported that the White House was quietly seeking candidates in the hopes of naming a new director of the Federal Housing Finance Agency early next year, preferably someone who could easily win Senate confirmation.


Which brings up the question: Will a new FHFA director mean a new policy on principal reduction for underwater mortgages backed by Fannie and Freddie?


The two government-supported entities are the backers of about half of all U.S. mortgages. Throughout the housing crisis, DeMarco has rejected the Obama administration’s attempt to allow principal reductions on those mortgages.

 What that has meant for borrowers is that the most important criteria in eligibility for a reduction in the principal owed is the investor in the mortgage. Bank of America, Chase, Wells Fargo and other lenders have done mortgage modifications that included principal reductions for a number of borrowers. But their hands are tied when it comes to Fannie and Freddie loans: Homeowners can get mortgage modifications that will cut their interest rate or lengthen the life of the loan, but the amount owed cannot be cut.

Deutsche Bank is predicting that DeMarco will be replaced by an academic; Housing Wire discusses several candidates here. The bank’s analysts predict that any FHFA principal forgiveness program would be focused on "earned forgiveness" – rewarding people who continue to pay their mortgages. That’s a change from most modification programs, which focus on those who have fallen behind.

David Dayen at Firedoglake suggests that the replacement of DeMarco has little to do with principal reduction and everything to do with the FHFA’s $200 billion lawsuit against 17 banks, alleging that the banks sold shaky securities to Fannie and Freddie. He writes:

So banks still have this extraordinary exposure from the housing collapse and their fraudulent sale of mortgage-backed securities. And their biggest hurdle comes from the FHFA lawsuit. If it’s successful, it will inform all these other lawsuits and cost banks up to hundreds of billions of dollars. And people think the Obama administration wants to replace Ed DeMarco over principal reduction?
Compared to the FHFA lawsuit, all the other lawsuits and enforcement actions by the federal regulatory apparatus are pinpricks. That lawsuit opens up the banks to far more exposure. In addition, banks have complained about lending standards for selling loans to Fannie and Freddie in the secondary market, and the due diligence to which they have submitted new loans. A new FHFA director would have control over all of this, and if the benchmark is "confirmability from Republicans," I would hardly expect a more aggressive or interventionist policy profile.


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