WASHINGTON Nov 22 More than 20 Democrats in
the U.S. House of Representatives on Tuesday called on the
regulator of Fannie Mae and Freddie Mac to
help underwater borrowers by allowing their loan principal to
The regulator has faced increasing pressure to permit the
write-down of principal by the two government-controlled
mortgage finance providers as a way to help some of the
millions of Americans who owe more than their homes are worth.
The Federal Housing Finance Agency, however, has stood fast out
of concern such a change would undercut finances of Fannie and
"We strongly urge that you reconsider your refusal to allow
principal reductions to achieve better-performing (loan)
modifications and avoid the extreme losses of unnecessary
foreclosures," the 21 lawmakers wrote in a letter to the
Fannie Mae and Freddie Mac provide guarantees to investors
against the possible default of loans, which encourages banks
to make new loans. The two companies are the biggest sources of
U.S. mortgage financing, and regulations on their activities
have a widespread effect on the mortgage market.
Fannie Mae and Freddie Mac, which were taken over by the
government in 2008, have together received more than $145
billion in taxpayer-funded support.
Given an expanding gap between U.S. home values and
mortgage balances, many Democrats and housing industry
representatives have argued for comprehensive anti-foreclosure
efforts that include principal write-downs.
Mortgage modifications usually involve a reduction in the
interest rate but not the principal balance of the loan.
In the letter, Democrats estimated principal reductions for
troubled borrowers would lead to lower defaults and reduce the
risk of default for about 20 percent of Fannie and Freddie's
Efforts to reduce principal debt are rare, often voluntary.
Fannie and Freddie are also concerned that writing down loan
balances would create a moral hazard -- the concept that rescue
efforts breed further behavior that exacerbates the existing
problem -- prompting other borrowers to stop making timely
"The performance of the enterprises' mortgage modifications
leaves much to be desired for homeowners, for the housing
market, and for taxpayers," Representative Brad Miller, a
Democrat and a member of the House Financial Services
Committee, said in a statement. Miller, who has proposed
legislation to reform housing finance, led the Democrats in
writing the letter.
Some economists see principal reductions as central to
cleaning up the housing mess and preventing foreclosures.
Settlement talks between the government and some of the biggest
mortgage servicers to clean up alleged foreclosure abuses
include widespread principle reductions in their agreement.