WASHINGTON — Administration officials are attempting to lean on the Federal Housing Finance Agency to reconsider its resistance to principal reductions on loans purchased by Fannie Mae and Freddie Mac, Treasury Secretary Tim Geithner told lawmakers Wednesday.
Geithner, who appeared at a hearing with Federal Reserve Board Chairman Ben Bernanke before the House Oversight Committee, said Treasury is working with FHFA Acting Director Ed DeMarco to determine whether principal write-downs for certain underwater borrowers could be done in a way that is palatable to the agency.
"There are certain cases where we think there's a pretty strong economic case for principal reduction as part of a strategy to limit the future losses of the" government-sponsored enterprises, said Geithner. "What we're trying to do is encourage Mr. DeMarco, who is fully independent, to take another look at the evidence because we think there's a place to do more in a way that is consistent with the mandate that Congress gave him."
Principal reductions have emerged as a crucial sub-issue in efforts to work out troubled loans threatened by foreclosure. An array of experts and officials have cited research showing write-downs as perhaps the only broad-based way to resolve bad credits short of mass foreclosures. But the GSEs, as well as others in the industry, have resisted such reductions.
While DeMarco has said that principal reductions are one of several tools available, the FHFA has found other tools are more effective, such as lower interest rates and longer loan terms.
At an earlier hearing Tuesday, Geithner said he hopes a review of the facts around principal write-downs will close the gap on any differing views. "We want to make sure that working off the same basis of facts … we look with a neutral independent view about where there's a case for principal reduction, where there's a case for other choices for homeowners and we're working through that with him," he told members of the House Financial Services Committee.
On Wednesday, Geithner said Treasury has been holding discussions with DeMarco to help "narrow the differences between us" and he hinted there could be further clarity soon.
"We're working through those numbers with him, and I expect to hear more from him in the next couple of weeks," said Geithner.
Still, he acknowledged the challenges FHFA faces in addressing the continued glut of troubled loans while still managing conservatorships that limit costs to taxpayers.
"We want to make sure that those institutions that are doing things to not just help repair the damage in the housing market, but they're doing so consistent with their obligations established by Congress to make sure they're doing things that would limit the risk of future losses to the taxpayer," said Geithner.
Ultimately, whatever the outcome, the decision rests with DeMarco, he added.
"The administration does not have any authority to compel the FHFA to undertake specific activities and under the conservatorship mandate they have to make sure they meet a very tough test, appropriately so," said Geithner. "He'll have to make these choices."
While the Fed in a recent white paper withheld an official position on which tool would be most effective in addressing troubled mortgages, Bernanke agreed that research has shown that principal reductions "sometimes" can be effective.
"Obviously, if we can avoid unnecessary, uneconomic foreclosures we should do that and there are multiple ways of doing that," he said. "We didn't come down in favor of any specific approach. I think it depends on the situation, but what we noted was that no matter how hard we work, and the country's been working pretty hard on this issue, that there are going to still be a number of foreclosures that occur."
DeMarco has sparred with other members of the administration, including Housing and Urban Development Secretary Shaun Donovan, and lawmakers over his unwillingness to allow borrowers to reduce the principal on their mortgages.
Rep. Elijah Cummings, D-Md., the Oversight Committee's ranking Democrat, urged Geithner to keep up the pressure.
"The only official that does not share this view appears to be Ed DeMarco, the acting director of FHFA," Cummings said. "His opposition is strange because his own data which he provided to us earlier this year shows that principal reductions would save the United States taxpayers billions of dollars compared to foreclosures.
"I would ask you to use your most convincing voice to try him to move up the dime."