The Federal Reserve last week released a set of proposals for aiding the battered American housing market, including a series of ways to help homeowners who are buried under the weight of unsustainable mortgage payments or who now find themselves significantly underwater on their home (meaning they owe more on their mortgage than their house is worth). New York Federal Reserve President William Dudley added to the list a proposal for reducing mortgage principal (the outstanding amount on the loan) for underwater homeowners.
The Senate GOP, which had obstructed all manner of help for homeowners, reacted with outrage, saying that helping homeowners in such a way would be, in the words of Sen. Bob Corker (R-TN), “completely egregious“:
Republican Senators Orrin Hatch of Utah and Bob Corker of Tennessee criticized the Federal Reserve for overstepping its role by making policy recommendations on how the U.S. government should try new ways to spur the housing market.
Hatch, the top-ranking Republican on the Senate Finance Committee, said the housing study sent by Chairman Ben S. Bernanke to Congress last week, along with recent Fed speeches, “intrudes too far into fiscal policy advice and advocacy.” Corker said New York Fed President William C. Dudley’s suggestion last week that Fannie Mae and Freddie Mac reduce the principal of the loans they guarantee was “absolutely egregious.”
Reducing principal is one of the most effective ways to keep troubled borrowers — many of whom are underwater or behind on their mortgage payments through no fault of their own — out of foreclosure, and it would also boost the economy. A report from the The New Bottom Line — a coalition of community, faith-based and labor groups — found that “if banks wrote down all underwater mortgages to market value and reﬁnanced the homeowners into 30-year, ﬁxed-rate loans at current market interest rates, that would pump $71 billion into the national economy.”
The Senate GOP, instead, derides the idea, after filibustering an Obama administration nominee because he may have been sympathetic towards principal reductions. But, perhaps that’s not surprising from a party that thinks foreclosure prevention efforts simply “need to stop.”