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Democrats push to subpoena FHFA over principal reductions

Democrats on the House oversight committee are pushing to subpoena the Federal Housing Finance Agency to obtain an analysis looking at what effects principal reductions would have on Fannie Mae and Freddie Mac.

FHFA Acting Director Edward DeMarco has long defended the agency’s policy of keeping Fannie and Freddie mortgage servicers from writing down principal. Allowing such an option would only forge more losses for the government-sponsored enterprises who already owe the Treasury Department roughly $151 billion in bailouts, he and both CEOs at Fannie and Freddie concluded.

However, both CEOs are on their way out, and other Democrats in Congress have pushed the White House to replace DeMarco as well.

Mortgage servicers primarily use principal reduction for loans held on portfolio or for private investors. And it has been used sparingly. In the third quarter of 2011, servicers cut principal on 10,722 modifications, roughly 7.8% of all workouts during the period, according to the Office of the Comptroller of the Currency. Roughly 4 million Fannie and Freddie loans are currently underwater, meaning the property is worth less than the loan on the home.

In a November committee hearing, DeMarco said he would provide the lawmakers documents and analysis used for determining the principal reduction policy.

“We have been through the analytics of the underwater borrowers at Fannie and Freddie, and looked at the foreclosure alternative programs that are available, and we have concluded that the use of principal reduction within the context of a loan modification is not going to be the least-cost approach for the taxpayer,” he said at the time.

But despite numerous requests since, DeMarco has not sent the materials. Reps. Elijah Cummings, D-Md., and John Tierney, D-Mass., sent a letter to committee Chair Darrell Issa, R-Calif., Wednesday asking him to subpoena the agency.

“While Mr. DeMarco has failed to provide supporting documents demonstrating why a principal reduction program is not in the best interest of taxpayers, economists are increasingly announcing their support for such a program,” Cummings and Tierney wrote.

They referenced a recent white paper from the Federal Reserve, acknowledging the need for principal reduction to coerce borrowers into staying in their home and provide a boost to the overall economy.

“Principal reduction may reduce the incidence of default both by improving a household’s financial position, and thus increasing its resilience to economic shocks, and by reducing the incentive to engage in ‘strategic’ default (that is, to default solely based on the household’s underwater position rather than on the affordability of the payments),” according to the white paper, though Fed researchers admitted the potential benefits would be hard to quantify.

New York Fed Chief William Dudley recently urged the FHFA to greenlight more principal reductions on GSE loans as has California Attorney General Kamala Harris.

A spokesman for the House oversight committee said Issa’s office is currently reviewing the request.

The FHFA could not immediately comment.

Write to Jon Prior.

Follow him on Twitter @JonAPrior.

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