WASHINGTON, April 6 The Obama administration
wants Fannie Mae and Freddie Mac, which finance the bulk of U.S.
mortgages, to start reducing loan balances for troubled
borrowers, but with safeguards to prevent them from purposely
defaulting to obtain relief.
Housing and Urban Development Secretary Shaun Donovan laid
out the case for a program with such checks and balances to
convince the Federal Housing Finance Agency, which regulates the
companies, to provide more mortgage aid.
"This isn't about force; this is about making the right
decision for homeowners and for the taxpayers," Donovan said in
an interview taped for C-SPAN's public affairs television that
was set to air on Sunday.
The FHFA is evaluating whether financial incentives offered
by the White House would be enough to cover the cost of Fannie
Mae and Freddie Mac writing down mortgage
debt. The agency said it may complete the analysis by mid-April.
"We believe that with the changes that we've made over the
past couple months that the case is compelling," he said.
Democrats have mounted pressure on the FHFA to use
government resources to subsidize the cost of mortgage loan
forgiveness. The agency has been criticized by consumer
advocates for focusing too much on limiting taxpayers' liability
for the U.S. housing bailout instead of making more targeted
efforts to help borrowers.
FHFA Acting Director Edward DeMarco has blocked Fannie Mae
and Freddie Mac from reducing principal amounts owed on
mortgages, saying that would drive up the cost of a taxpayer
bailout of the two government-run firms, which has topped $150
billion. Fannie and Freddie, the two largest sources of housing
money, were taken over by the government more than three years
ago as mortgage losses mounted.
By using increased financial incentives, the administration
has made it harder for the FHFA to dismiss concerns that
allowing Fannie Mae and Freddie Mac to reduce homeowners' loan
debt is too costly.
About 11 million U.S. homeowners are "underwater" - meaning
they owe more on their mortgage than their home is worth - and
home values have dropped more than 30 percent since the housing
bubble began to burst in 2006.
Those opposed to mortgage write-downs also argue that
forgiveness would encourage defaults among borrowers who have
kept making payments on mortgages that exceed the values of
their homes. About three out of every four underwater borrowers
with mortgages that Fannie Mae or Freddie Mac back are current
on their payments.
"This is a reasonable concern in certain circumstances but
there are ways to be careful and design around it in order to
ensure that it won't be a real issue," Donovan said.
The HUD secretary said the regulator should design a loan
forgiveness program that limits any "moral hazard" of
encouraging bad borrowing behavior and the risk that some
homeowners might stop making timely payments with an incentive
"We shouldn't punish the vast majority of folks where
strategic default isn't really a risk just to fix what may be a
risk with a small percentage (of borrowers)," Donovan said.
Asked how the administration might respond if the FHFA
decides to turn down those incentive payments and avoid creating
a program focused on mortgage forgiveness, Donovan did not offer
The White House cannot "pre-judge what we might do if he
comes back with a different answer," he said. "We'll have to
look at that analysis and understand what his concerns are."