Regulator Rejects Obama Mortgage Write-Down Plan

Published August 13, 2012

The nation’s top government housing supervisor has rejected a plan by the Obama administration to reduce mortgage balances for hundreds of thousands of homeowners.

This is a blow to White House officials who are eager to show they can help fix the housing market. The plan was to allow mortgage entities Fannie Mae and Freddie Mac to write down mortgages for certain borrowers who owe more than their houses are worth. The federal government has Fannie and Freddie in conservatorship.

Edward DeMarco, head of the Federal Housing Finance Agency, said the expected benefits do not outweigh the long-term risks.

He was under extreme pressure from administration officials to accept the plan. DeMarco’s verdict drew an immediate rebuke from Democratic Party lawmakers and the Obama administration.

TARP Backing for Plan

The Obama administration wanted to use some of the money from the $700 billion Troubled Asset Relief Program to pay Freddie Mac and Fannie Mae as much as 63 cents for every dollar of mortgage forgiveness.

In a letter released to the news media, Geithner told DeMarco he does not think his decision is good for the country.

“I do not believe it is the best decision for the country, because, as we have discussed many times, the use of targeted principal reduction by the GSEs would provide much needed help to a significant number of troubled homeowners, help repair the nation’s housing market, and result in a net benefit to taxpayers,” Geithner wrote. He estimated Fannie and Freddie could have saved $3.6 billion by allowing mortgage principal reductions.

The housing market began to decline in 2006. Trillions of dollars in equity have been erased. Though the market has shown signs of improvement, nearly 11 million homeowners still owe more than their property is worth on the market. The Obama administration has struggled with several taxpayer-financed plans to enable people to stay in their homes, none of which has had much impact.

Emphasis on Refinancing

Among the various programs devised to handle the housing problems, most of the emphasis has been on encouraging refinancing at low interest rates, which has not worked. Obama is trying to persuade voters his policies have helped the U.S. economy in advance of the November presidential election. Presumed Republican challenger Mitt Romney has said the process of foreclosure should be permitted so the housing market can hit bottom and begin to climb again.

Geithner said data showed the Obama administration’s writedown support program would help almost half a million homeowners and save taxpayers as much as $1 billion.

DeMarco estimated 74,000 to 248,000 borrowers could have qualified for a mortgage reduction but said executing the program might have increased the costs to taxpayers. His agency concluded the Obama proposal would have been expensive and time-consuming to execute and would have prompted other homeowners to stop paying their mortgages in hopes they, too, could receive a mortgage writedown.

Alden Brooks ([email protected]) is the community member of Oak View Law Group and financial content writer.