In 2010, Fannie Mae Pulled The Plug On Plan To Help Underwater Homeowners

Fresh off the news that government backed mortgage giant Fannie Mae knew about foreclosure fraud abuses being committed by the nation’s biggest banks as far back as 2003, but did nothing, Bloomberg News reported today that Fannie Mae also “pulled the plug” on a plan to help underwater homeowners in 2010. In a letter, Senate Democrats quote a former Fannie Mae employee who claims that the plan was ready to go, but was killed at the last moment because Fannie Mae executives were “philosophically opposed to writing down principal balances”:

A former Fannie Mae employee told the committee that the mortgage finance company had developed a pilot program for reducing mortgage debt for borrowers who owe more on their house than the property is worth.

The purpose of the plan was to develop “a responsible way to reduce principal balances for underwater mortgage borrowers without creating undue incremental moral hazard,” the employee told the committee.

The pilot had preliminary approvals from officials at Fannie Mae, FHFA, and the Office of the Comptroller of the Currency, a bank regulator, according to the former employee.

In mid-2010, two weeks before its launch, senior Fannie Mae executives cancelled the program because they were “philosophically opposed to writing down principal balances,” according to the former worker, who was quoted in the letter without being identified.

Edward DeMarco — the acting head of the Federal Housing Finance Agency, the regulator for both Fannie Mae and Freddie Mac — has also been, as one former administration official said, a “boulder” in the way of allowing the mortgage giants to reduce principal for troubled homeowners, on the grounds that it would be bad for Fannie and Freddie’s bottom line. Meanwhile, “some economists counter that while principal reductions might lead to a short-term hit for Fannie and Freddie, it would ultimately result in fewer underwater mortgages, fewer foreclosures and a healthier housing market — all good for Fannie and Freddie’s bottom line.”

The opposition to principal reductions within Fannie Mae, according to Bloomberg, seems to be much more pernicious, in that they think mortgage writedowns are an unfair bailout for homeowners. But this ignores the fact that many homeowners are underwater — owing more on their mortgage than their home is currently worth — not due to anything they did but because of the 2008 bursting of the housing bubble and the foreclosure epidemic that followed, which dragged home values down to a point from which they have yet to recover.