FHFA Declines to Extend HAMP PRA to GSEs

By Sarah Borchersen-Keto, CCH Washington News Bureau, Contributing Author, the CCH Federal Banking Law Reporter and Bank Digest; and John M. Pachkowski, J.D., Editor, CCH Federal Banking Law Reporter, Coordinating Editor, Bank Digest; Author, Anti-Money Laundering and Bank Secrecy: Compliance and the USA PATRIOT Act; co-Author CCH Financial Privacy Law Guide and Dodd-Frank Wall Street Reform and Consumer Protection Act—Law, Explanation and Analysis.

The FHFA has announced that it will not direct Fannie Mae and Freddie Mac to implement the Home Affordable Modification Program Principal Reduction Alternative (HAMP PRA) which, is designed to assist homeowners with underwater mortgages. The FHFA has concluded that the anticipated benefits do not outweigh the costs and risks. The agency reached its decision after extensive analysis (here), (here) and (here) of the revised HAMP PRA, including the determination by the Treasury Department to begin using Troubled Asset Relief Program monies to make incentive payments to Fannie Mae and Freddie Mac. Acting FHFA Director Edward J. DeMarco added, “Given our multiple responsibilities to conserve the assets of Fannie Mae and Freddie Mac, maximize assistance to homeowners to avoid foreclosures, and minimize the expense of such assistance to taxpayers, FHFA concluded that HAMP PRA did not clearly improve foreclosure avoidance while reducing costs to taxpayers relative to the approaches in place today.”

“Not the Best Decision”

Treasury Secretary Timothy Geithner said he is concerned about the FHFA's “continued opposition” to allowing Fannie Mae and Freddie Mac to use targeted principal reduction in their loan modification programs. Writing to DeMarco July 31, 2012, Geithner said the FHFA position was “not the best decision for the country” as it would fail to provide much needed help to a significant number of homeowners.

Congressional Reaction

Reaction to the FHFA's action fell along party lines, with Republican lawmakers supporting the FHFA's decision.

Sen. Bob Corker, R-Tenn., a member of the Banking Committee, issued a statement “thank[ing] Ed DeMarco for making his decision based on objective analysis and with the taxpayer in mind.” Sen. Pat Toomey, R-Pa., added, “Acting Director DeMarco deserves to be commended for insisting on conserving the government-sponsored enterprises' assets and protecting taxpayers from the risk of an even bigger Fannie and Freddie bailout. Undoubtedly, he came under considerable pressure from this administration, but Acting Director DeMarco did the right thing today by putting taxpayers' interests ahead of election-year politics.”

Rep. Scott Garrett, R-N.J., Chairman of the House on Subcommittee on Capital Markets and Government-Sponsored Enterprises, also thanked Director DeMarco “for spearheading the FHFA's thoughtful and extensive analysis to examine the impact of principal forgiveness on Fannie Mae and Freddie Mac mortgages.” He added, “As the FHFA's thorough analysis confirms, the cost to the American taxpayer of principal forgiveness far outweighs the benefits to the overall housing market. I praise Director DeMarco's decision to protect the American taxpayer by preventing the Obama Administration from continuing to exploit the bailout of the GSEs to push their own social housing goals.” Rep. Darrell Issa, R-Calif., Chairman of House Oversight and Government Reform Committee, noted, “Today's decision by Acting Director DeMarco protects taxpayers from picking up even more costs to bailout Fannie Mae and Freddie Mac's bad financial bets. Other policies, such as temporarily reducing payments have been shown to be much more effective and cost efficient than principal write-downs. This now rejected spending proposal, which Obama Administration officials have touted, would not have made a meaningful improvement in reducing foreclosures in a cost effective way for taxpayers. Acting Director DeMarco should be commended for maintaining organizational and regulatory independence and resisting efforts to politicize federal housing policy in an election year.”

House and Senate Democrats were critical of the FHFA's decision.

Sen. Robert Menendez, D-N.J., Chairman of the Senate Subcommittee on Housing, Transportation, and Community Development, stated, “This is a terrible decision and one that underscores Mr. DeMarco's intransigence when it comes to debt forgiveness for homeowners--even as his own analysis shows the benefit to taxpayers.” He added, “Making decisions based on ideology rather than fact could cost Fannie, Freddie, and taxpayers billions of dollars...Taxpayers and homeowners deserve fair and complete answers, not shoddy analysis that is driven by ideology and ignores obvious solutions like shared appreciation.”

Sen. Jack Reed, D-R.I., commented, “This seems to be a case of what's good for the goose is not good for the gander. The Acting Director has okayed principal reduction for Fannie and Freddie under Hardest Hit, but won't for other Americans. Meanwhile banks, who know a thing or two about profit and shareholder value, are increasingly allowing principal reduction. No wonder the FHFA Inspector General has questioned the efficiency and effectiveness of the FHFA's oversight of the GSEs.”

Rep. Elijah E. Cummings, Ranking Member of the House Committee on Oversight and Government Reform stated, “It is incomprehensible that Mr. DeMarco would reject the chance to save up to a billion dollars in taxpayer funds while helping nearly half a million homeowners stay in their homes...He should immediately withdraw this reckless and misguided letter and start following the law Congress passed.”