The Wall Street Journal reported earlier this month that the Obama administration has been trying to cajole Fannie Mae and Freddie Mac into writing down loan principal for troubled homeowners. Incoming House Financial Services Chairman Spencer Bachus (R-AL), however, is not on-board with the effort. And he’s evidently not alone.
In fact, the GOP is so dead-set against helping borrowers who are underwater on their mortgages — meaning they owe more than their house is currently worth — that they are delaying confirmation of the administration’s nominee to lead the Federal Housing Finance Agency (Fannie and Freddie’s chief regulator) because he might be sympathetic to loan write-downs:
Senate Republicans are pressing to delay the confirmation of Joseph A. Smith, the North Carolina banking commissioner, to head the Federal Housing Finance Agency. They are concerned he might allow Fannie and Freddie to participate in an Obama administration initiative to write down loan balances, say people familiar with the matter.
Mr. Smith first appeared to be headed for a quick confirmation. But he has become tripped up by a broader fight between the White House, which wants to use the firms to help heal housing markets, and GOP critics that say they shouldn’t be run as policy vehicles that create more losses.
The administration’s foreclosure prevention efforts have largely flopped, and the banking industry is on pace to foreclose on one million homes both this year and next. Allowing Fannie and Freddie to write-down loans could help put a dent in these huge numbers.
Republicans, however, are arguing that such a move is unfair, as Fannie and Freddie would be forced to eat losses while helping only specific homeowners. Senate Banking Committee Ranking Member Richard Shelby (R-AL) said that write-downs amount to “redistribution from taxpayers in general to certain classes of home owners.”
But this basically ignores the wider negative effects foreclosures, which drag down home values for everyone. As The American Prospect’s Tim Fernholz explained:
[Republicans have a] rather short-sighted approach, given that Fannie and Freddie are already propping up almost the entire housing market, and that the costs of both foreclosure and consumer debt overhang are a drag on the broader economy. Foreclosure is everyone’s problem, especially when many of these borrowers are underwater not because of their own irresponsibility but because of dramatic drops in the price of housing.
According to Treasury Secretary Tim Geithner there “is a pretty good economic case for Fannie Mae and Freddie Mac to participate in those programs.” FDIC Chair Sheila Bair has also called for principal write-downs, saying that they “could help reduce defaults, keep people in their homes, avoid costly foreclosures, and enhance the value of these loans.” But the GOP has stood in the way of every effort to help troubled borrowers, and this is no exception.