DeMarco Stands Firm as Principal Reduction Debate Wages On

By: Krista Franks Brock 03/02/2012

The principal reduction debate wages on with the Federal Housing Finance Agency (FHFA) standing firm in its resolve that the strategy is not in the best interest of the GSEs while facing criticism and questioning from lawmakers.

At a Senate Banking Committee hearing last week, HUD Secretary Shaun Donovan announced that Treasury will now offer the GSEs incentives for administering principal reductions.

Having recently increased the incentives offered to banks for administering principal reductions, Treasury now aims to “ensure consistency throughout the HAMP program” by making sure GSE borrowers have the same options as non-GSE borrowers.

At the same hearing, FHFA Acting Director Edward DeMarco faced questioning regarding his reluctance toward principal forgiveness at Fannie May and Freddie Mac.

“Both companies have been reviewing principal forgiveness alternatives. Both advised me they do not believe that it is in the best interest of the companies to do so,” he told lawmakers.

However, he did agree with lawmakers that “foreclosure is the worst possible outcome in almost all instances. It is the most costly. It is the most devastating to the family. It is the most devastating to the neighborhood and surrounding community, and we have a responsibility to make all prudent actions to find a remedy to a troubled borrower short of foreclosure because of these costs.”

DeMarco maintained that principal reduction is just one of four tools for preventing foreclosure. The other three include reducing the interest rate, extending the loan term, and forbearance.

“What FHFA has found consistently in its analysis is that the first three of those tools work better than the fourth one with regard to our fundamental mandate of preserving and conserving,” DeMarco said.

DeMarco also pointed out that while the GSEs together guarantee 60 percent of mortgages, their loans make up just 29 percent of seriously delinquent loans.

In addition, while they make up a minority of serious delinquencies, GSE loans make up about half of permanent HAMP modifications.

Regardless of their success through forbearance and other alternatives, Senator Robert Menendez (D-New Jersey) pointed out that banks are turning to principal forgiveness for 20 percent of their modifications.

As banks are equally as motivated as the GSEs to bring in the highest returns, Menendez wonders why the discrepancy in approach