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FHFA chief DeMarco on defensive over refinancing

By Greg Robb, MarketWatch

WASHINGTON (MarketWatch) — The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, is already playing a leading role in helping homeowners avoid foreclosure, in contrast to how it is often portrayed, the agency’s acting chief said Tuesday.

Edward DeMarco’s comments came in his testimony to the Senate Banking Committee, where he was grilled about FHFA policy forbidding debt forgiveness, or principal reduction, for homeowners behind on their payments and whose homes are underwater.

California’s attorney general, Kamala Harris, has asked FHFA to suspend foreclosures until the agency completes a review of this stance.
Read ‘California AG seeks foreclosure suspension’


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DeMarco did not address Harris’s letter, but said that FHFA favors principal forbearance rather than principal reduction. Under forbearance, a portion of the debt is suspended until the end of the mortgage or until the house is sold.

DeMarco called principal reduction the least effective tool to assist in the effort to set up an affordable monthly mortgage payment for troubled borrowers. Better options include cutting the interest rate on the mortgage, extending the term of the loan, or forbearance, he said.

Those “three tools work better” than principal reduction, DeMarco said.

In his opening statement, Sen. Tim Johnson, a South Dakota Democrat who is the chairman of the Senate Banking panel, urged the FHFA to “take additional steps to facilitate refinancing for families currently stuck in higher-interest mortgages held by Fannie and Freddie.”

Housing and Urban Development Secretary Shaun Donovan noted that banks are already allowing principal reduction on loans in their own portfolios.

“If banks are doing that with their own portfolios, I think it shows they have clearly made the decision that it protects their own investments,” he said.

“If I look at the range of tools, principal reduction is the one tool that we have made perhaps the least progress on until recently,” Donovan said.

Donovan said the government’s recent $26 billion settlement with five of the biggest banks over foreclosure abuses would also spur more principal reduction.
Read earlier story about foreclosure settlement.

Treasury has recently tripled the incentives for mortgage modifications that include principal reduction in its Home Affordable Modification Program, or HAMP, he said.

The Obama administration has notified FHFA that Treasury would pay these same incentives to Fannie and Freddie if they participate in the program, he said.

In separate testimony, Federal Reserve Board Governor Elizabeth Duke defended her agency’s recent extraordinary focus on housing, saying that the failure of the market to recover is holding back the entire economy.

“The failure of the housing market to respond to lower interest rates as vigorously as it has in the past indicates that factors other than financial conditions may be restraining improvement in mortgage credit and housing market conditions and thus impeding the economic recovery,” Duke said.

The Fed released a paper on the market laying out policy action that Congress could take to help the market, including taxpayer assistance.

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