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The forgiveness brawl

By Polyana da Costa · Bankrate.com
Wednesday, May 2, 2012
Posted: 10 am ET

Helping homeowners avoid foreclosure through partial mortgage loan forgiveness is a bad idea that will cost taxpayers billions of dollars. For a while, that's the mantra that FHFA's acting director Ed DeMarco used to justify his refusal to let Fannie Mae and Freddie Mac offer principal reduction programs for borrowers.

Guess what? He was wrong.

Fannie Mae could have saved taxpayers "significant amounts of money" if it had implemented a loan forgiveness program in 2010, according to internal documents obtained by Democratic lawmakers on the House government oversight committee.

The committee sent a letter to DeMarco Tuesday saying it obtained documents marked "confidential" and "proprietary" that show Fannie officials developed in 2009 pilot programs that would have offered borrowers partial loan forgiveness. But the pilot programs were not implemented despite evidence showing it would benefit borrowers and Fannie, according to the letter.

"The documents make clear that Fannie Mae officials concluded as far back as 2009 that principal reduction programs had enormous potential to save the U.S. taxpayers significant sums of money, even when compared to other types of modifications," the letter states.

The programs were going to be based on a "shared equity" concept, according to the documents. In a shared equity concept, the lender normally forgives part of the loan so that the homeowner can afford the payments, but gets a share of the profit if the homeowner sells the house in the future for more than what it's owed.

One of the pilot programs Fannie developed was to be conducted with Citigroup and could have saved Fannie Mae more than $410 million, according to the letter.

The pilot had the approvals necessary to move forward but was suddenly suspended in July 2010.

Why? Because of "operational" issues and because some Fannie officials were "philosophically opposed to writing down principal balances," a former Fannie Mae employee told the committee, according to the letter.

DeMarco's response

DeMarco responded to the lawmakers with a letter saying he is disappointed. He was unhappy with their "failure to contact FHFA to address your concerns, and the release of selective elements of the proprietary and confidential materials you received."

With the letter, the FHFA released documents that confirmed Fannie and Freddie developed the pilot programs. But the programs were terminated because of "operational concerns" and based on "staff perspectives and experience" at the corporate level, DeMarco says.

The FHFA continues to consider principal forgiveness alternatives, he says. And that "belies any ideological tilt on our part," he says.

Really? What do you think?

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