Cummings: Internal Fannie Mae documents call mortgage principal reduction a money-saver

Internal Fannie Mae documents show the mortgage financier was about to launch a principal reduction program in 2010 after determining that it would save taxpayers hundreds of millions of dollars, a Baltimore congressman says -- contradicting claims by Fannie's regulator that such a move would be costly.

U.S. Reps. Elijah E. Cummings of Baltimore and John F. Tierney of Massachusetts, Democrats who sit on the House Committee on Oversight & Government Reform, sent a joint letter Tuesday to regulator Edward DeMarco demanding more information about why the program was "mysteriously terminated" in July 2010.


The program was a "shared equity" model, requiring borrowers getting principal written down to give back some of the later gains, if any.

"Based on the documents we have obtained, it appears that the shared equity principal reduction pilot program should have been implemented years ago, and the failure to do so may have resulted in unnecessary losses to U.S. taxpayers," Cummings and Tierney wrote in their letter. "This was not merely a missed opportunity, but a conscious choice that appears to have been based on ideology rather than Fannie Mae's own data and analyses."


A spokesman for Fannie Mae referred questions to the Federal Housing Finance Agency, which DeMarco heads. DeMarco shot back in a letter to the congressman Tuesday that he "strongly" disagrees "with any characterization of FHFA's work or motives as anything but in keeping with the professionalism expected of this agency."

"The fact that FHFA continues to consider principal forgiveness alternatives, including recent HAMP program changes initiated by the Treasury Department, belies any ideological tilt on our part," he wrote.

Proponents of principal reduction say it would give underwater homeowners -- those who owe more than their homes are worth -- a much-needed break and cut down on the number of more financially costly foreclosures. Opponents say it's not a cost-effective approach and worry about borrowers defaulting just to get the reduction, at least in cases where a program is structured so you must be delinquent for the help.

About a quarter of Maryland homeowners with a mortgage are upside down on it, real estate data firm CoreLogic estimates. Among other problems, the underwater phenomenon has left people stuck in place, unable to sell unless they can bring a lot of money to the settlement table or convince their bank to approve a short sale.

The recent robosigning settlement with the country's biggest banks calls for principal reductions. But that won't include loans held by Fannie Mae and Freddie Mac, the financing giants that together own or guarantee 60 percent of the country's mortgages. The housing finance agency oversees both institutions, which were taken over by the government in 2008 amid the financial meltdown.

DeMarco has said on many occasions that principal reduction would be expensive. In a January letter to the House Committee on Oversight & Government Reform, he estimated the cost of paying down all 3 million of Fannie and Freddie's underwater mortgages to the homes' value at nearly $100 billion.

"Given that any money spent on this endeavor would ultimately come from taxpayers and given that our analysis does not indicate a preservation of assets for Fannie Mae and Freddie Mac substantial enough to offset costs, an expenditure of this nature at this time would, in my judgment, require congressional action," DeMarco wrote.

Most of the underwater mortgages are not delinquent, he added.


But Cummings and Tierney said the internal documents they obtained show that Fannie Mae officials were convinced that a "shared equity" principal reduction initiative would pay off. The officials estimated that the pilot program, which they got approvals to launch in spring 2010 with Citibank as a partner, would cost about $1.7 million to implement and could save more than $410 million.

Officials expected bigger savings if the pilot were to be expanded later, the Democrats said. They said the documents also show that Fannie Mae officials felt the shared equity approach addressed "moral hazard" concerns about defaulting just to get the deal.

"When the program was suddenly suspended in July 2010, Citibank officials asked what changed at the '11th hour,'" Cummings and Tierney wrote. "No document has been produced that memorializes this decision or its justification."

Some documents speak to unspecified "operational" challenges, they said, but nothing that tallies up these costs vs. the expected benefits.

"Instead, a former Fannie Mae employee has informed us that the program was terminated by officials who were 'philosophically opposed to writing down principal balances,'" the congressmen wrote.

Along with DeMarco's response, the Federal Housing Finance Agency made public a summary of documents it said it sent to the congressmen in April. Alfred M. Pollard, the agency's general counsel, said in the summary that both Fannie and Freddie had considered principal reduction.

"These pilot programs, to the extent they were begun, ended due to complex operational issues involving system changes, accounting considerations and the interest level of Fannie Mae's partners," Pollard wrote.


Cummings and Tierney, saying that some of the documents about the Fannie program came from "an independent source" rather than DeMarco, suggested the regulator withheld information. The congressmen wrote that they have "very serious concerns" about the "failure to provide Congress with complete and accurate information about these important matters."

Cummings -- who faced foreclosure on his own home years ago but got current before it was too late -- has pressed DeMarco for months to offer more justifications for his stance on principal reduction.

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