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Bank Errors Cited in Fannie Mae Principal-Reduction Test Failure

Wednesday, 02 May 2012 10:58 AM

Wells Fargo & Co. employees ruined a pilot program to test principal reductions on mortgages guaranteed by Fannie Mae because they failed to correctly input data into a computer system, the Federal Housing Finance Agency said in a letter released today.

Details of the failed program came as Democratic lawmakers attempted to boost pressure on the FHFA to allow writedowns of principal on mortgages guaranteed by Fannie Mae and Freddie Mac. Edward J. DeMarco, the acting director of the FHFA, has barred the taxpayer-owned companies from reducing principal on seriously delinquent loans on the grounds that it would hurt their bottom line.

The FHFA is calculating whether changing the policy makes sense in light of new financial incentives the U.S. Treasury Department is offering the companies to forgive principal, DeMarco said in a letter to Representative Elijah Cummings, a Maryland Democrat, and Representative John Tierney, a Massachusetts Democrat.

The two lawmakers said earlier in the day that an FHFA internal study found that a pilot program on principal reductions would save money for the taxpayer-owned companies, but was killed for ideological reasons. In February, the two lawmakers similarly charged that DeMarco pulled the plug on a plan to reduce principal for ideological reasons, citing a former Fannie Mae employee.

DeMarco said the two Democrats were wrong. “I strongly disagree with any characterization of FHFA’s work or motives as anything but in keeping with the professionalism expected of this agency,” he wrote today’s letter.

April 12 Letter

DeMarco also released an April 12 letter that he sent the lawmakers outlining the details of two Fannie Mae pilot programs. Both programs were terminated before results could be evaluated, he said.

One, in conjunction with Wells Fargo, was terminated due to an “operational incident,” the letter said. Wells Fargo employees were supposed type in the amount of principal they reduced on troubled loans into a computer system. There were errors in the manual entry, invalidating the data on several hundred loans.

“This failure added to the operational problems seen with the pilot program,” the letter said.

Similarly, a pilot program with Citigroup Inc.’s Citibank unit was terminated after officials at the bank “opted not to move forward,” DeMarco wrote.

Fannie Mae and Freddie Mac have completed 1.1 million loan modifications without principal reductions since the end of 2008, and have engaged in more than 1 million other transactions to avert foreclosures, including short sales or repayment plans.

About 3 million borrowers are underwater on loans backed by Fannie Mae and Freddie Mac. Of those, three in four are current on their payments.

The U.S. government has spent $190 billion to shore up Fannie Mae and Freddie Mac since they were taken into federal conservatorship in 2008 after their investments in risky loans soured.

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