Principal Reduction Fight Takes New Turn

WASHINGTON — House Democrats said Tuesday that a Fannie Mae program to reduce mortgage principal was killed two years ago by ideologically blinded officials who ignored projections that the plan would save taxpayers money.

The pilot program was developed inside Fannie Mae in late 2009, shortly after Edward DeMarco, a stalwart opponent of principal reduction, took over as acting director of the federal agency that makes key decisions for the government-controlled mortgage giant. It was killed before launching in mid-2010.

Democratic Reps. Elijah Cummings and John Tierney have been gathering information about the program, and in a letter to DeMarco on Tuesday, they summarized previously undisclosed Fannie Mae documents that show the pilot program had support inside Fannie.

"This was not merely a missed opportunity, but a conscious choice that appears to have been based on ideology rather than Fannie Mae's own data and analysis," wrote the two Democrats, who sit on the House Oversight Committee.

The revelations put additional pressure on DeMarco at a time when his agency, the Federal Housing Finance Agency, is already facing considerable heat from congressional Democrats and the Obama administration to allow principal reductions for at least a limited number of delinquent homeowners.

Later Tuesday, DeMarco responded to the two House Democrats in a sharply worded letter, accusing them of selectively releasing documents and questioning his agency's motives.

DeMarco's letter was vague about why the Fannie Mae pilot program was shelved — he wrote that "at the end of the day there was not full agreement to proceed" and added that "operational concerns were a key determining factor."

Throughout his tenure, DeMarco has been an outspoken opponent of reducing principal on delinquent mortgages. He argues that the strategy will not provide the best return for the taxpayers who are responsible for losses at Fannie Mae and Freddie Mac, and will create bad incentives for homeowners who are current on their mortgages.

The new documents show that at least some officials at Fannie believed that there was a strong business case for trying principal reduction, but they do not show whether it was officials at Fannie Mae or at the FHFA who ultimately decided to shelve the program.

The two House Democrats, who are pushing the agency to release more documents about the Fannie Mae pilot program, first revealed the program's existence in February. At that time, the congressmen said that they had spoken to a former Fannie employee who blamed the program's demise on senior officials at Fannie who were philosophically opposed to principal reduction.

Under the aborted program, which Fannie Mae developed with Citibank, Fannie would have tested the idea of reducing loan principal for delinquent borrowers. In exchange, the borrowers would have given up a portion of the future appreciation of their homes' value, a concept known as shared equity.

"The business case for shared equity is strong," a Fannie presentation from Nov. 5, 2009, stated. "On average, shared equity improves expected cash flow by $8,800 per loan."

The Democrats' letter stated that the pilot program was approved by Fannie Mae's single family risk officer in April 2010, but was suspended in July of that year, prompting questions from Citibank.

A document released by the FHFA in response to the Democrats' letter contended that when Fannie decided not to move forward with the pilot program in July 2010, it approached Citibank with an alternative proposal that would have tested principal forgiveness, but not the shared-equity model.

The FHFA document stated that Citibank opted not to move forward with that version of the pilot program. A Citi spokesperson said Tuesday that Fannie explained its decision to pull the plug in 2010 by saying that it did not have the resources to implement the pilot program.

Andrew Wilson, a Fannie spokesman, declined to comment Tuesday.