Oversight Committee Democrats Urge FHFA Director to Produce Documents on Principal Reduction

Nov 30, 2011
Press Release

Washington, DC – Today, Rep. Elijah E. Cummings, Ranking Member of the House Committee on Oversight and Government Reform, and all Democratic Members of the Committee sent a letter to Edward DeMarco, the Acting Director of the Federal Housing Finance Agency, seeking documents he promised to produce to the Committee regarding his analysis of programs to reduce mortgage principal and why such programs never serve the long-term interests of taxpayers when compared to foreclosure.

“For too long now,” Cummings said, “we have heard superficial excuses about why principal reduction programs are not feasible at Fannie Mae and Freddie Mac, despite a growing chorus of economists and other experts who believe these programs serve the long-term interests of taxpayers.  Even though commercial banks have implemented their own principal reduction programs, FHFA stubbornly continues to favor massive waves of foreclosures.  It’s high time to see the actual data and analyses behind this policy, and to work towards new approaches that finally put American homeowners and our nation’s economy first.”

DeMarco committed to providing these documents during a hearing before the Committee on November 16, 2011, in response to questioning by Representative John Tierney, who pointed out that several banks are already implementing principal reduction programs that serve their financial interests while providing assistance to homeowners.  The Members requested that DeMarco provide the documents by December 9, 2011. 

The full letter follows:

November 30, 2011

Mr. Edward DeMarco
Acting Director
Federal Housing Finance Agency
1700 G Street NW
Washington, D.C. 20551

Dear Acting Director DeMarco:

            During the Committee’s hearing on November 16, 2011, you agreed to provide the Committee with:  (1) the specific statutory provision you believe prohibits the Federal Housing Finance Agency (FHFA) from allowing Fannie Mae and Freddie Mac to reduce mortgage principal in all cases; and (2) the analysis you conducted, including the data you examined, demonstrating that principal reduction never serves the long-term interests of the taxpayer when compared to foreclosure.  We are writing to request that you provide these documents by December 9, 2011.

            When you were asked about statutory prohibitions against principal reduction programs, you responded:  “I believe that the decisions that we’ve made with regard to principal forgiveness are consistent with our statutory mandate.”  Although you were not asked about providing “general support” to the housing market, you also said this:  “I do not believe that I’ve been appropriated taxpayer funds for the purpose of providing general support to the housing market.”  During your testimony, however, you identified no specific statute that prohibits FHFA from allowing Fannie Mae and Freddie Mac from developing principal forgiveness programs in select cases that would serve the long-term interests of both taxpayers and homeowners.

            As Rep. John Tierney explained, when Congress enacted the Emergency Economic Stabilization Act in 2008, it specifically directed FHFA, Freddie Mac, and Fannie Mae, among other things, to “implement a plan that seeks to maximize assistance for homeowners.”  Many economists believe that principal reduction programs could fulfill this goal while also serving the long-term interests of the taxpayers who are funding Fannie Mae and Freddie Mac.  They include the following:

  • Federal Reserve Chairman Ben Bernanke:  “In this environment, principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure.”
  • Martin S. Feldstein, former Chairman of the Council of Economic Advisers under President Reagan:  “To halt the fall in house prices, the government should reduce mortgage principal when it exceeds 110 percent of the home value.”
  • Alan Blinder, Former Vice Chairman of the Federal Reserve:  “Most economists see principal reductions as central to preventing foreclosures. ... Perhaps the cost to taxpayers could be reduced by giving the government—or even private investors—some of the upside when house prices finally start climbing.”
  • Neil Barofsky, former Special Inspector General for the Troubled Asset Relief Program:  “There needs to be a recognition that many borrowers will never make the required payments on their underwater mortgages, and that the owners of these mortgages have already lost any meaningful chance of obtaining a full recovery of the outstanding principal.  The sooner that this reality is recognized and addressed, the sooner a recovery can take hold.  As such, an aggressive principal reduction program is necessary.”

          During your testimony, you stated that you had completed a thorough analysis of why foreclosures always serve the interests of taxpayers better than principal reduction programs.  Specifically, you stated:

We have been through the analytics of the underwater borrowers at Fannie and Freddie, and looked at the foreclosure alternative programs that are available, and we have concluded that the use of principal reduction within the context of a loan modification is not going to be the least-cost approach for the taxpayer.

          As Rep. Tierney noted, however, several banks are already implementing principal reduction programs that serve their financial interests while providing assistance to homeowners.  For example, Ocwen has established a program under which a servicer may reduce a loan to 95% of a home’s fair market value, and the excess principal is forgiven over three years as long as the homeowner remains current on mortgage payments.  When the home is sold or refinanced, the borrower is required to share 25% of the appreciated value with Ocwen.  According to the company’s CEO:

Shared appreciation modifications help homeowners avoid foreclosure and restore equity, providing a significant benefit to the customer, the economy, and the housing market.

          Other banks also have principal reduction programs, including JPMorgan Chase, Ally Financial, Bank of America, and Wells Fargo, which reportedly reduced the balances of approximately 73,000 borrowers by an average of $51,000 in 2009 and 2010.

          At the conclusion of Rep. Tierney’s questioning, he asked you to provide both the statutory authority for your claim that you are prohibited from allowing principal reduction programs and the analysis you conducted demonstrating that foreclosures always serve taxpayer interests when compared to principal reductions.  He stated:

What you’re telling me flies in the face of all these people who have come up with a quite different idea. ... I’d like you to do two things for the Committee if you would.  First, I want you to identify anywhere in the statute that specifically prohibits you from developing principal reduction programs. ... [S]econd, I’d like you to submit whatever analysis you have done that shows why reducing the principal on some mortgages is worse for the United States taxpayer than foreclosure.

          In response, you committed under oath to providing these documents, stating:  “We can provide that information as you suggested, Congressman.”

          We are writing to request that you provide this information by December 9, 2011.  If you have any questions, please contact Davida Walsh at (202) 225-5051.  Thank you for your cooperation with this request.


Elijah E. Cummings                                                       Edolphus Towns
Ranking Member                                                          Member

Carolyn B. Maloney                                                     Eleanor Holmes Norton
Member                                                                       Member

Dennis J. Kucinich                                                        John F. Tierney
Member                                                                       Member          

Wm. Lacy Clay                                                            Stephen F. Lynch                                            
Member                                                                       Member

Jim Cooper                                                                  Gerald E. Connolly
Member                                                                       Member

Mike Quigley                                                                Danny K. Davis                                               
Member                                                                       Member

Bruce Braley                                                                Peter Welch
Member                                                                       Member

John Yarmuth                                                               Christopher S. Murphy                        
Member                                                                       Member

Jackie Speier

cc:        The Honorable Darrell E. Issa, Chairman
            Committee on Oversight and Government Reform

112th Congress