(DES MOINES, Iowa) Attorney General Tom Miller this week urged the overseer of Fannie Mae and Freddie Mac, which own a majority of the nation's home loans, to reverse his refusal to implement loan principal forgiveness in the agencies' loan modification programs.
In a letter sent Wednesday to Edward DeMarco, Acting Director of the Federal Housing Finance Agency (FHFA), Miller and a coalition of 11 state attorneys general argue that the failure to offer underwater borrowers principal write-downs obstructs the effective resolution of the nation's foreclosure crisis and harms struggling homeowners and investors.
Given Director Demarco's recent acknowledgment that principal forgiveness may be beneficial to both homeowners and investors, the letter advocates for swift implementation of principal forgiveness in federal loan modification programs. "FHFA's continued position that principal forgiveness conflicts with its goal of asset preservation is not supported by real data," the attorneys general write. The attorneys general argue that principal forgiveness restores a borrower's status as a stakeholder and provides them a stronger incentive to maintain payments.
Miller, the lead state attorney general in a joint state-federal national mortgage servicing settlement with the nation's five largest mortgage servicers finalized by a federal judge last week, negotiated a substantial principal reduction plan that is part of the settlement.
"We think that it's pretty clear that when principal reduction is used in the right circumstances, the re-default rate will be very low. I feel strongly that it's one more tool needed to help rebuild our economy through addressing the foreclosure crisis," Miller said.
In the letter, the attorneys general argued that the increase of incentive payments to investors for allowing forgiveness under the Home Affordable Modification Program (HAMP) should also reduce concerns regarding the potential impact on the financial stability of Fannie Mae and Freddie Mac as either owner or guarantor of these loans. Additionally, the letter states that reluctance to engage in principal forgiveness based on the inability of internal computer systems to handle new programs is not an excuse as the nations' largest banks overcame similar concerns after the national mortgage servicing settlement just finalized.
As part of their argument, the attorneys general write, "More than five million people have lost their homes due to foreclosure in the past five years, with millions more on the brink of foreclosure. Effectively resolving this foreclosure crisis is a key to restoring a healthy economy for our entire country. Because Fannie Mae and Freddie Mac own a majority of the nation's home loans, they must be a leader in the arena of loan modification best practices, and not an obstruction."
The FHFA has formally acknowledged that principal forgiveness can serve the long-term interests of taxpayers when compared to foreclosure by combining the goal of asset preservation and foreclosure prevention. According to Director DeMarco’s remarks to the Brookings Institution on Tuesday, an initial analysis of new incentives from the Treasury Department by the FHFA shows that Fannie Mae and Freddie Mac could save $1.7 billion if they applied principal forgiveness in its modification programs.
In addition to Miller's participation, the coalition of 11 state attorneys general, led by Massachusetts Attorney General Martha Coakley, includes California, Delaware, Illinois, Maryland, Minnesota, New Mexico, New York, Oregon, and Vermont.
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