WASHINGTON – Credit unions could be hurt by a proposal aired today that would allow Fannie Mae and Freddie Mac to write down the principal on millions of at-risk mortgages, industry leaders warned this afternoon.
“We are gravely concerned that incorporating principal forgiveness modification as part of borrower-assistance programs would create an incentive for at least some borrowers to strategically default, causing credit unions and their members significant losses that they will not be able to recoup,” said Fred Becker, president of NAFCU. “Credit unions would be more acutely affected by such losses because of their inability to tap into markets to raise capital in order to support revenue-generating programs that would offset the losses.”
“NAFCU believes that principal forgiveness is a policy that would ultimately hurt the housing market and cost credit unions and their members greatly. Accordingly, we strongly urge you to refrain from adopting such policy,” said Becker.
Becker’s remarks came in a letter to Ed DeMarco, director of the Federal Housing Finance Agency, which oversees Fannie and Freddie, who said this afternoon the agency is considering allowing the two housing giants to write down principal payments owed by at-risk borrowers to help them stay in their homes.In a speech this afternoon DeMarco said that mortgage principal reductions would lower Fannie and Freddie losses and help stabilize home prices faster.
Any reduction in principal would help the at-risk borrowers but come at a big cost to Fannie and Freddie, which have been racking up tens of billions of government bailout costs. The write down would not occur at the originator, the credit union or the bank, but would hurt real estate values in the affected markets and put more pressure for credit unions and banks to also agree to principal write downs, according to Becker.
The federal regulator still says the agency must weigh the reductions against losses to taxpayers, who already have spent $170 billion to bail out the companies. Allowing reductions could lead to a rise in borrowers who strategically default on their loans, he warns. And fewer than 1 million homeowners would be eligible for principal reductions — a fraction of the estimated 11 million Americans who owe more on their mortgages than their homes are worth, he added.
The agency will make a final decision on principal reductions by the end of the month.
