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DEMARCO REITERATES STANCE AGAINST PRINCIPAL FORGIVENESS released a statement in late July reiterating his stance that offering principal reduction for Fannie Mae and Freddie Mac loans is not in the best interest of the GSEs and taxpayers. DeMarco faced a barrage of criticism for FHFA acting director Edward DeMarco not allowing the GSEs to apply the Home Affordable Modification Program Principal Reduction Alternative (HAMP PRA) program to underwater loans and was urged by lawmakers to reconsider his position. After what DeMarco said was extensive likelihood of successfully modifying and reinstating such delinquent loans is small, considering the fact that early intervention is a key factor to the success of a modification, which means the anticipated $500 million benefit is unlikely. Another reason DeMarco provided for analysis, he stated, "FHFA has concluded that the anticipated benefits do not outweigh the costs and risks. Given our multiple responsibilities to conserve the assets of Fannie Mae and Freddie Mac, maximize assistance to homeowners to avoid foreclosures, and minimize the expense of such assistance to taxpayers, FHFA concluded that HAMP PRA did not clearly improve foreclosure avoidance while reducing costs to taxpayers relative to the approaches in place today." In a letter addressing Sens. Tim Johnson (D-South Dakota) and Richard C. Shelby (R-Alabama), DeMarco explained his position and the results of FHFA's analysis. Using a model-based analysis, a test was conducted to see if reducing a portion of a borrower's principal would decrease the likelihood of default to the extent that the GSEs and taxpayers were better off. According to the letter, in the most not supporting a HAMP PRA program for the GSEs was the operating costs for the program, the burden of which, he said, would fall on taxpayers whether it was paid by Treasury or the GSEs. The letter stated the implementation cost would be roughly between $70 million to $90 million for just the GSEs, plus costs imposed on servicers. DeMarco also raised concerns over the needed help to a significant number of troubled homeowners, help repair the nation's housing market, and result in a net benefit to taxpayers," said Geithner. The secretary's eight-page letter included arguments restating the case for principal reduction. He pointed to the FHFA's own analysis for evidence that principal reductions could save the GSEs as much as $3.6 billion and could save taxpayers up to $1 billion. This evidence led economist Paul Krugman to criticize DeMarco's aversion to the strategy, reducing DeMarco's argument to "because he doesn't feel like it." Krugman also called into question whether DeMarco is fit for his role. In a similarly candid statement, Jared Bernstein, senior fellow at the Center on Budget and Policy Priorities, told Reuters, "In unusual times, like the aftermath of the worst housing bubble implosion in decades with 30-plus-percent price declines, guess what? Write-downs happen." David H. Stevens, president of the Mortgage moral hazard issue and the fear that underwater borrowers, who are current on their mortgages, might decide to fall behind in order to qualify for a HAMP PRA. If this were to happen, it could negate program benefits. "If only a very small portion of the enterprises' currently underwater but performing borrowers (3,000 to 19,000) strategically defaulted to seek principal forgiveness, HAMP PRA would result in a net loss to taxpayers even using the model- based assumptions most favorable to the program," said DeMarco. According to FHFA, approximately 80 favorable analysis, implementing HAMP PRA may result in about 74,000 to 248,000 borrowers becoming eligible for principal reduction modifications at a positive financial benefit to the GSEs. "However," DeMarco added, "nearly all of Bankers Association, released a statement expressing the trade group's stance on the issue. "We agree that principal forbearance can help borrowers realize a payment reduction in a similar way as principal reduction. It is critical to implement solutions that help the American homeowner without incurring the negative long- term impact of making credit less available and more expensive," he said. While DeMarco's position was met with opposition from a broad spectrum of individuals, his decision received a few words of praise as well. Sen. Bachus (R-Alabama) released a statement percent of Fannie Mae and Freddie Mac underwater borrowers remain current on their loans. DeMarco pointed out that, while some supporting DeMarco's unwavering stance. He went so far as to say DeMarco "deserves praise for standing up for the best interests of the American people." "Everyone knows a job is the best foreclosure this benefit is simply a transfer from taxpayers to the enterprises, which would add to the over $188 billion in taxpayer support the enterprises have already received. Under other reasonable assumptions, implementing HAMP PRA would actually increase taxpayer costs." In the best-case scenario, DeMarco said the projected net benefit to taxpayers is $500 million, but the vast majority of the benefit comes from borrowers who do not make a mortgage payment for more than a year. Adding yet another damper to the best- case scenario, the acting director said the 48 mortgage market participants can be more selective when deciding who qualifies for a principal reduction, the GSEs would need to adopt a more systematic and uniform approach when establishing eligibility requirements that will go out to the GSEs' mortgage servicers. In his letter, DeMarco highlighted other efforts FHFA focuses on to help underwater borrowers and prevent foreclosures such as streamlining refinance opportunities and enhancing the short sale process. Treasury Secretary Timothy Geithner sent a letter to DeMarco, expressing disagreement with the acting director. "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 mitigation plan," Bachus stated. "Instead of more failed government programs, the president should work with us on bipartisan solutions that help create jobs and heal the housing market," he added. STAT INSIGHT 3.7 Million Homes lost to foreclosure since September 2008. Source: CoreLogic

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