“We concluded that the potential benefit was too small and uncertain relative to the known and unknown costs and risks,” DeMarco told reporters after a months-long agency analysis.
DeMarco’s decision came despite prolonged pressure from the Obama administration, Democratic lawmakers on Capitol Hill and housing advocates, who argued that principal reduction is an essential tool in softening the fallout of the housing crash.
Treasury Secretary Timothy F. Geithner chastised DeMarco for his decision in a letter Tuesday, even as he acknowledged DeMarco’s right to forbid principal reduction in his role as independent regulator for Fannie and Freddie.
“Five years into the housing crisis, millions of homeowners are still struggling to stay in their homes and the legacy of the crisis continues to weigh on the market,” Geithner wrote. “You have the power to help more struggling homeowners and help heal the remaining damage from the housing crisis.”
Geithner noted that the FHFA’s own analysis showed that Fannie and Freddie potentially could save $3.7 billion by participating in the administration’s housing program — and taxpayers could save $1 billion. A Treasury analysis accompanying the letter said that up to a half-million homeowners could benefit from the program.
In explaining his decision, DeMarco released a 15-page paper outlining the internal analyses that agency officials used to try to determine the costs and benefits of allowing principal reduction at Fannie and Freddie, which have been under government conservatorship since 2008 and hold about half of the country’s loans.
DeMarco acknowledged that under some scenarios studied by the FHFA, a principal-reduction program could save taxpayers money while also helping certain homeowners. But he was quick to note that any such program would take time and money to implement and that the potential savings could be wiped out by lower-than-expected homeowner participation or by a small percentage of borrowers deciding to “strategically default” on their mortgages. “We certainly have seen commentators actually encouraging borrowers to consider this kind of activity,” he said.
DeMarco reiterated his concern about the potential long-term consequences of principal forgiveness, saying that rewriting valid contracts could spook investors, encourage bad behavior on the part of homeowners and increase mortgage costs in the future. “It’s an important thing for us, the policymakers, to weigh,” DeMarco said, even as he acknowledged that such effects are “not readily measurable.”