Letter to president, congressional leadership calls Fannie Mae and Freddie Mac an "obstacle to progress" for nation's homeowners; stresses the need for principal write-downs
New York Attorney General Eric T. Schneiderman has joined Massachusetts Attorney General Martha Coakley in leading a nine-state coalition demanding new, permanent leadership at the Federal Housing and Finance Agency, the agency that oversees Fannie Mae and Freddie Mac. In a letter to President Obama and congressional leaders, the attorneys general write that, under the current leadership of the FHFA's Acting Director Edward DeMarco, Fannie Mae and Freddie Mac have been a "direct impediment to our economic recovery" by the continued refusal to give principal relief for struggling homeowners, and call for a new permanent leader to replace DeMarco, an appointee of former President George W. Bush.
"The FHFA's refusal to allow for principal write-downs that would result in more loan modifications is a direct impediment to our economic recovery and stands in way of our efforts to provide much needed assistance to homeowners in New York and across the country," Schneiderman said. "Under the leadership of Acting FHFA Director Edward DeMarco, Fannie Mae and Freddie Mac remain an obstacle to progress by refusing to adopt policies that will help maximize relief for struggling homeowners. The time has come for the president and Congress to work together to install a new, permanent leader at FHFA that will be a partner, not an impediment, in the national effort to comprehensively address the foreclosure crisis."
In the letter, the attorneys general argue that principal write-downs are a central component of the national settlement, and continue to bring meaningful relief to distressed borrowers, spurring the nation's economic recovery. Principal reduction is a form of loan forgiveness that would help "underwater" borrowers whose mortgages are worth more than their homes.
In general, all loan modifications rely on a net-present value analysis that serves the dual purposes of helping borrowers keep their homes and meeting the economic interests of lenders and investors. The positive impact of mortgage modifications, which often include principal write-downs, continues to be felt on the housing market, economy and local communities.
The FHFA's continued position that principal forgiveness conflicts with its goal of asset preservation is, "not supported by reality," the attorneys general assert in the letter. They say the agency's current policy actually reduces the value of its holdings portfolio. It is far more profitable for any financial institution to hold a portfolio of performing $200,000 mortgages that lets families keep their homes than a portfolio of non-performing $250,000 mortgages headed toward default.
"We have worked tirelessly, along with our federal, state and local partners to develop a multi-pronged approach to dealing with the foreclosure crisis," the letter concludes. "Fannie Mae and Freddie Mac should be among our partners in this effort, and leaders in the arena of loan modification best practices. Instead, they have been an obstruction."
Last year, Schneiderman led the negotiation of a national mortgage settlement under which the five largest mortgage servicers have agreed to a $25 billion penalty under a joint state-national settlement structure. A minimum of $17 billion goes directly to borrowers nationally through a series of homeowner relief efforts, including principal reduction. Servicers have also committed $3 billion to an underwater mortgage-refinancing program for homeowners whose mortgages are worth more than the value of their homes.
To date, 21,535 New York homeowners have received $1.8 billion in assistance, including $1.2 billion in principal reductions on first and second mortgages, and mortgage refinances that lower interest rates on their loans.
The national mortgage settlement is the largest joint state-federal settlement in history and it is the result of a massive civil law enforcement investigation and initiative by state attorneys general, state banking regulators, and nearly a dozen federal agencies. The agreement was with the nation's five largest servicers: Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Company, Citigroup Inc., and Ally Financial, Inc. (formerly GMAC). Collectively, the five banks service nearly 60 percent of the nation's mortgages.
Using a portion of New York's share of the national mortgage settlement, in June, Schneiderman announced the launch of the homeowner protection program, his office's commitment of $60 million over three years to fund housing counseling and legal services for struggling New York homeowners. Throughout this program, 35 legal services organizations and 59 housing counseling agencies statewide will receive funding to provide free foreclosure prevention services. By supporting the work of direct service providers who specialize in delivery of assistance to at-risk homeowners affected by foreclosures, this effort will minimize homeowner displacement and foster the stabilization of neighborhoods across the state for the benefit of the public and the state as a whole.