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DeMarco: Principal Write-Downs Expensive, Benefits Uncertain

By Alan Zibel, WSJ Blogs

How far should the federal government go to stabilize the housing market?

Many Democrats say more should be done. That's why there have been a series of calls of late from Democratic lawmakers on Capitol Hill and Federal Reserve officials to have government-controlled mortgage finance companies Fannie Mae and Freddie Mac reduce the value of borrowers' mortgages for homeowners who are “underwater,” meaning that they owe more on their properties than their homes are worth.

Fannie and Freddie and their regulator, however, have resisted doing so, despite pressure from the highest levels of government.

Last week, the acting director of the Federal Housing Finance Agency, which regulates Fannie and Freddie, sent lawmakers a detailed analysis of why cutting loan balances doesn't make sense from a financial standpoint, given the regulator's mandate to “preserve and conserve” Fannie and Freddie’s assets.

Edward DeMarco, acting director of the FHFA, argued that doing so would cause taxpayers to spend more money on the mortgage giants' rescue than other foreclosure-prevention strategies. Fannie and Freddie have been propped up by taxpayer support for more than three years, a rescue that's cost taxpayers about $151 billion

About 3 million borrowers with loans backed by Fannie and Freddie owed more on their homes than their properties were worth as of last summer. That's about 10% of the loans they own or guarantee. A write-down of all 3 million of those mortgages would cost taxpayers $100 billion, Mr. DeMarco estimated.

Fannie and Freddie do offer principal forbearance plans, in which lenders don't require payments on a portion of a loan for until the borrower sells the home or pays off the loan. What they don't offer is forgiveness, where that portion of the loan is wiped out

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