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Hundreds of thousands of homeowners facing foreclosure might get help by having the amount they owe reduced by Fannie Mae and Freddie Mac. Yesterday, a top federal regulator came a step closer to allowing that move, as NPR's Chris Arnold reports.
CHRIS ARNOLD, BYLINE: NPR and ProPublica reported three weeks ago that Fannie Mae and Freddie Mac had each just completed a new analysis and found that principal reductions would save the government-owned enterprises money. Now, the official figures just came out yesterday from Edward DeMarco. He controls Fannie and Freddie, as the head of the Federal Housing Finance Agency. The FHFA has just completed its own report.
EDWARD DEMARCO: In this analysis, principal reduction is better for the enterprises. That is, it reduces the enterprises' losses by $1.7 billion.
ARNOLD: This is a big change. Fannie and Freddie are now owned by the government and they control most of the home loans in the country. And DeMarco has steadfastly resisted cutting the amount that borrowers owe. But now, the Treasury Department has tripled an incentive through TARP, the bank bailout fund.
Speaking at the Brookings Institution in Washington, DeMarco said that this would steer billions of dollars towards Fannie and Freddie if they do these write-downs.
DEMARCO: Incentive payments from the Treasury to the enterprises - the expected incentive payments, it would be $3.8 billion.
ARNOLD: Critics say this incentive amounts to a shell game. By giving Fannie and Freddie taxpayer money from another source, they say the Treasury Department has made the write-downs look good on Fannie and Freddie's books, but still at taxpayer expense. Proponents counter that this would help the housing market and taxpayers eventually.
ANDREW JAKABOVICS: Two-thirds of taxpayers are homeowners, and protecting housing markets and stabilizing communities, etcetera, all accrues to their benefit, too. So it's just where you draw the line on your analysis.
ARNOLD: Andrew Jakabovics is a housing economist with the nonprofit Enterprise Community Partners. For years, he's been an advocate of principal write-downs. DeMarco is not announcing any final decision yet, but reading the tea leaves in the speech, Jakabovics says he came away thinking...
JAKABOVICS: Where they are now would seem to be, I mean, sort of this $1.7 billion net positive to do it seems to mean that they're leaning into it. To the extent that they're leaning into it kicking and screaming is, you know, on some level irrelevant.
ARNOLD: The kicking and screaming refers to the fact that there's been a lot of pressure from the White House and Democrats in Congress for Fannie and Freddie to get more aggressive with foreclosure prevention. Many in that camp think that principal write-downs should play a role.
Jakabovics thinks that this wouldn't be a silver bullet to fix the entire housing market, but he says it might reach several hundred thousand borrowers, and overall, it would help.
JAKABOVICS: I think this is a meaningful tool to be able to have in the arsenal.
ARNOLD: Still, DeMarco did raise concerns about just writing off $20,000 or $50,000 of what a borrower owes, even if that would save money compared to a foreclosure. DeMarco asked if forgiving debt for some delinquent homeowners might encourage others to stop paying their mortgages to try to get the same deal.
DEMARCO: The far larger group of underwater borrowers, who today have remained faithful to paying their mortgage obligations, are the much greater contingent risk to housing markets and to taxpayers.
ARNOLD: In other words, you don't want to encourage those homeowners to start defaulting on purpose.
But some experts just don't like the unfair, free-lunch aspect of principal write-downs. Anthony Sanders is a professor of real estate finance at George Mason University. He thinks that there'd be unintended consequences, and the risks just outweigh the benefits.
ANTHONY SANDERS: This is a major shift in economic policy. Do we really want to go out on the hairy edge, based on a few anecdotal assumptions that this might work? And I would argue no.
ARNOLD: For its part, the private sector has already been going there. Banks have started reducing principal to avoid foreclosure in nearly one out of five of the problem bank-owned loans that they modify. The regulator, Ed DeMarco, says he expects to decide whether Fannie and Freddie will do principal write-downs in the next few weeks.
Chris Arnold, NPR News, Washington.