Congress Calls for Principal Reductions from GSEs

Twenty-one members of Congress sent a letter to Federal Housing Finance Agency (FHFA) Acting Director Edward DeMarco urging him to encourage principal reductions on loans backed by Fannie Mae and Freddie Mac.

""We do not urge that the enterprises reduce principal on mortgages as a kindness to homeowners,"" the letter stated.

Instead, the congressmen support principal reductions on the basis that they will save taxpayers from some further potential losses.

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The lawmakers cite first-quarter data from the GSEs stating 17.7 percent of Fannie borrowers are underwater, as are 19 percent of Freddie borrowers. These borrowers, they say, ""are obviously at great risk of eventual default.""

With 44 percent of loans modified in the past two years more than three months past due, according to Freddie Mac data cited in the letter, ""[t]he performance of the enterprises' mortgage modifications leaves much to be desired for homeowners, for the housing market, and for taxpayers,"" the letter stated.

The representatives urge DeMarco to disregard the short-term effects of principal reductions on the GSEs' balance sheets in favor of looking at the long-term positive effects these reductions might have.

They point to an Amherst Securities study that negates the ""moral hazard"" theory, which hypotheses that offering principal reductions encourages homeowners to default.

""Right now, the FHFA is preventing underwater homeowners with mortgages backed by Fannie Mae or Freddie Mac from receiving balance reductions, even when a principal modification would save the investor â€" in this case meaning taxpayer â€" money compared to foreclosure,"" said George Miller (D-California), one of the representatives who signed the letter.