U.S. Democrats on Tuesday pressed Fannie Mae and Freddie Mac's regulator to release documents they claimed would show that allowing the government-controlled companies to forgive mortgage debt could cost taxpayers less than other forms of mortgage aid.
Representative Elijah Cummings, the top Democrat on the House Oversight Committee, asked the head of the Federal Housing Finance Agency to confirm with internal company documents that principal reduction programs proposed as early as 2009 might have reduced losses.
Cummings and Representative John Tierney of Massachusetts said in the letter to FHFA Acting Director Edward DeMarco that a former Fannie Mae employee had told congressional staff that executives at the mortgage giant canceled "at the 11th hour" the launch of a pilot program to reduce loan balances for troubled borrowers in 2010, despite months of preparation and deliberation to test the success rate of principal forgiveness.
"Based on the documents we have obtained, it appears that the shared equity principal reduction pilot program should have been implemented years ago, and the failure to do so may have resulted in unnecessary losses to U.S. taxpayers," they said.
The claim is the latest push by congressional Democrats to pressure FHFA to allow the two companies to pursue principal write-downs for borrowers who owe more on their mortgages than their properties are worth.
FHFA says other anti-foreclosure tactics are less costly and as effective as principal forgiveness, and DeMarco has defended his opposition by contending that write-downs would violate his mandate of preserving Fannie Mae and Freddie Mac's assets.
However, the agency is evaluating an Obama administration proposal that would increase incentives for Fannie Mae and Freddie Mac to pursue principal reductions, hoping to offset whatever increased costs they might face.
Fannie Mae and smaller rival company Freddie Mac have cost taxpayers more than $150 billion since they were taken over by the government in September 2008. The two support about 60 percent of all new U.S. home loans.
According to the letter, the former staffer, whose name was not disclosed, said Fannie Mae had built the rationale for testing a mortgage reduction program as early as 2009, and that top executives had seen presentations and documents on the merits of such an initiative that could help underwater borrowers "perform better on a modification that re-establishes equity."
The documents cited by the lawmakers said Fannie Mae officials "concluded several years ago, after substantial study and review, that principal reduction programs could save the company and U.S. taxpayers money by dampening the number of foreclosures, "even when compared to alternatives such as principal forbearance."
The aim was to complete a pilot with Citibank as Fannie Mae's private-sector partner and determine whether cutting mortgage debt prevented borrowers from "walking away" from their homes by using a shared equity component.
The pilot program went through the vetting process at the company, yet was suspended in July 2010 without a clear explanation to Citibank, according to the letter.
The employee told congressional staff that the estimated cost of implementing the Fannie Mae pilot program was $1.7 million while estimated benefits were more than $410 million.
The congressmen said it was terminated not based on cost but because officials at the company were "philosophically opposed to writing down principal balances."
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