FHFA Chief Says ‘No’ to Principal Reductions

The acting chief of the Federal Housing Finance Agency (FHFA), the regulator that oversees both Fannie Mae and Freddie Mac, has responded to requests from legislators related to the two mortgage agencies’ participation in the Home Affordable Modification Program Principal Reduction Alternative (HAMP PRA):

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.

The FHFA’s decision drew an immediate — and critical — response from Treasury Secretary Timothy Geithner, according to MarketWatch. Geithner said he was “concerned about [FHFA’s] continued opposition … to [using] targeted principal reduction in … loan modification programs.” Citing the “clear benefits” of principal reduction to homeowners, Geithner urged the FHFA to reconsider its decision.

The HAMP PRA program offers investors incentive payments in exchange for cuts to mortgage principal for qualified borrowers. The Treasury Secretary said that FHFA’s own analysis estimates that a principal reduction program could help half a million borrows and save Fannie and Freddie $3.6 billion in the process.

Paul Ausick