WASHINGTON, April 23 Fannie Mae and Freddie Mac should participate in an Obama administration program that helps borrowers who owe more than their home is worth by writing down principal, a U.S. Treasury Department official said on Monday.
"Given the large percentage of outstanding mortgages that are currently backed by Fannie or Freddie, it is important that the GSEs (government-sponsored enterprises) participate in this program," said Mary Miller, Under Secretary for Domestic Finance, in prepared remarks for a speech at the National Council of State Housing Agencies conference in Washington.
The Federal Housing Finance Agency, which regulates Fannie and Freddie Mac, does not allow the two mortgage finance giants' to reduce loan balances for homeowners who are "under water" -- meaning they owe more on their properties than they are worth.
FHFA Acting Director Edward DeMarco has blocked the two companies from reducing principal amounts owed on mortgages, saying that it would drive up the cost of a taxpayer bailout of the two government-run companies, which has topped $150 billion.
"Principal reduction is an important tool to have at our disposal as we continue to repair damage caused by the housing crisis," Miller said.
DeMarco has said forbearance, comparatively, has shown lower losses. Forbearance lets the borrow reduce or suspend payments on a loan for a specific amount of time.
But Miller said that in some targeted cases, principal reduction makes sense for both homeowner and lender by helping to reduce investor losses and preventable foreclosures in the long term.
"That's the view of not only the administration and others within government, but also many private market participants," she said.
Still, FHFA is considering whether financial incentives offered by the U.S. Treasury to participate in the White House housing program would soften its concerns that principal write-downs would increase losses at Fannie Mae and Freddie Mac and require them to get more taxpayer funding.
The FHFA has provided a preliminary analysis on the cost of mortgage write-downs and anticipates a final decision will be delivered to the administration this month.
Fannie and Freddie, the two largest sources of housing money, were taken over by the government in September 2008 during the financial crisis.
Currently, about three in four loans backed by Fannie and Freddie that are underwater are still making regular payments.