Agency’s Own Data Show Principal Reduction Would Save Taxpayers Billions of Dollars Former Fannie Mae Employee Calls into Question DeMarco’s Response to Congress

Washington, DC (Feb. 8, 2012) – Today, Rep. Elijah E. Cummings, Ranking Member of the House Committee on Oversight and Government Reform, and Committee Member John F. Tierney sent a letter to Edward DeMarco, the Acting Director of the Federal Housing Finance Agency (FHFA), raising serious questions about his recent response to Congress arguing that principal reduction programs do not serve the interests of American taxpayers.

After months of withholding data and analysis, and in the face of a subpoena request, DeMarco finally sent a response letter to Cummings and Tierney on January 20, 2012, outlining his justification for refusing to approve any principal reduction programs for loans backed by Fannie Mae and Freddie Mac.

“The single most significant revelation in your letter to Congress,” wrote Cummings and Tierney, “is that, even based on your own questionable assumptions and data, principal reduction programs serve the taxpayer interests even when compared to your preferred alternative of forbearance.”

This revelation directly contradicts DeMarco’s testimony before the Oversight Committee on November 16, in which he stated that principal reduction “is not going to be the least-cost approach for the taxpayer.”

In addition, Cummings and Tierney revealed that a former Fannie Mae employee has now provided new information about a pilot program for principal reductions that was tentatively approved in 2010, but cancelled by Fannie Mae officials several months before the November elections in which Republicans took control of the House of Representatives. According the former employee, the officials were “philosophically opposed” to the concept of reducing principal, notwithstanding the potential economic benefits.

“We have now become aware of new information,” wrote Cummings and Tierney, “that calls into serious question the accuracy and completeness of your response, as well as your motivation for continuing to oppose principal reduction programs even when they have the potential to save American taxpayers billions of dollars.”

DeMarco’s letter to Congress did not mention this pilot program, and instead repeated his claim that he lacks the statutory authority to proceed with principal reduction programs.

In their letter, Cummings and Tierney also highlighted new reports that DeMarco is now blocking efforts to allow Fannie Mae and Freddie Mac to participate in principal reduction programs agreed to as part of the multi-state settlement under which the nation’s five largest mortgage servicers will provide billions of dollars in compensation for their abuses and illegal actions against homeowners.

“It appears that your refusal to follow Congress’ direction and allow principal reduction programs is based more on ideology and the fear of political backlash than on a straightforward analysis of the interests of American taxpayers,” they wrote.

“Unlike almost any other official in the entire government,” they added, “you have an historic opportunity to improve our nation’s fragile economy, to provide real assistance to millions of struggling homeowners, and to save American taxpayers billions of dollars in the process. It is time for you either to seize this opportunity or to step aside.”

Below is the full letter:

February 8, 2012

Mr. Edward DeMarco
Acting Director
Federal Housing Finance Agency
1700 G Street NW
Washington, D.C.  20551

Dear Acting Director DeMarco:

We are writing in response to your January 20, 2012, letter which discussed your refusal to authorize principal reduction programs for underwater mortgages owned or guaranteed by Fannie Mae and Freddie Mac, and which provided some of the analyses on which you claim to base your refusal.

The single most significant revelation in your letter is that—even based on your own questionable assumptions and data—your most up-to-date analysis demonstrates that principal reduction programs would serve taxpayer interests more effectively than any other alternative, including your preferred alternative of forbearance, particularly with respect to mortgages backed by Fannie Mae.  This revelation directly contradicts your testimony before the Oversight Committee on November 16, in which you stated that principal reduction “is not going to be the least-cost approach for the taxpayer.”

In addition, although we appreciate the information you provided, we have now become aware of new information that calls into serious question the accuracy and completeness of your response, as well as your motivation for continuing to oppose principal reduction programs even when they have the potential to save American taxpayers billions of dollars.

After reviewing the data and legal explanations set forth in your letter, a former employee of Fannie Mae has come forward with detailed information about a pilot program that was designed to offer principal reductions to borrowers with loans backed by Fannie Mae.  The program was tentatively approved in 2010, but cancelled several months before the November elections in which Republicans took control of the House of Representatives.

According to this former employee, the pilot program had obtained appropriate internal legal and accounting approvals, as well as the participation of a prominent mortgage servicing company, but the program was terminated by senior officials at Fannie Mae who were “philosophically opposed” to the concept of reducing principal.  The former employee also indicated that significant research had been conducted prior to initiating this pilot program, and that personnel from your office were directly involved in reviewing the program.

Your letter did not mention anything about this pilot program.  Instead, you repeated the unfounded claim that you lack the statutory authority to proceed with principal reduction programs at this time, and you focused instead on new analyses that you began receiving in December 2010, one month after the congressional elections.  If these allegations by the former employee are accurate, your response to Congress is seriously deficient and misleading.

Rather than highlighting these and other pertinent facts, you chose to begin your letter with a highly inflammatory statement that was quickly cited by the press—that it would cost American taxpayers $100 billion to reduce principal on all three million underwater mortgages owned or guaranteed by Fannie Mae and Freddie Mac.  This was an answer to a question that was never asked and a flagrant distortion of the fundamental issue.  A more relevant figure would have been an estimate of the costs of taking no action at all and allowing all three million underwater mortgages to default—an amount that vastly exceeds your $100 billion estimate.

In fact, your own calculations prove that principal reduction programs prevent losses from occurring.  The data you provided indicate that implementing principal reduction programs for even a small subset of these underwater homeowners would save taxpayers an estimated $28 billion compared to the losses that would occur if no action were taken to prevent defaults.

Economists across the political spectrum have concluded that addressing the housing crisis is the key to improving our nation’s economic recovery, and they believe principal reduction programs offer a sound approach to addressing this crisis responsibly while serving the interests of taxpayers.

Over the last several days, however, we have received troubling new reports that you are now blocking efforts to allow Fannie Mae and Freddie Mac to participate in principal reduction programs agreed to as part of the multi-state settlement under which the nation’s five largest mortgage servicers will provide billions of dollars in compensation for their abuses and illegal actions against homeowners.

We understand that the Federal Housing Finance Agency (FHFA) is not part of the Obama Administration, and that you do not take direction from Administration officials, but it appears that your refusal to follow Congress’ direction and allow principal reduction programs is based more on ideology and the fear of political backlash than on a straightforward analysis of the interests of American taxpayers.

Unlike almost any other official in the entire government, you have an historic opportunity to improve our nation’s fragile economy, to provide real assistance to millions of struggling homeowners, and to save American taxpayers billions of dollars in the process.  It is time for you either to seize this opportunity or to step aside.
BACKGROUND

During your testimony before the Oversight Committee on November 16, 2011, you made two assertions:  that FHFA lacks the statutory authority to authorize principal reduction programs for Fannie Mae and Freddie Mac; and that after examining data and analyses, you determined that principal reduction programs do not serve the long-term interests of taxpayers.

Specifically, Rep. Tierney asked why FHFA refused to allow Fannie Mae and Freddie Mac to utilize principal reduction programs when the Emergency Economic Stabilization Act of 2008 specifically directs FHFA, Fannie Mae, and Freddie Mac to “implement a plan that seeks to maximize assistance for homeowners.”

In response, you stated:  “I believe that the decisions that we’ve made with regard to principal forgiveness are consistent with our statutory mandate.”  You also stated:  “I do not believe that I’ve been appropriated taxpayer funds for the purpose of providing general support to the housing market.”  During your testimony, however, you identified no specific statute that prohibits FHFA from allowing Fannie Mae and Freddie Mac from developing principal reduction programs in select cases that would serve the long-term interests of both taxpayers and homeowners.

You also testified at the hearing that principal reduction programs do not serve the interests of taxpayers.  You stated:

We have been through the analytics of the underwater borrowers at Fannie and Freddie, and looked at the foreclosure alternative programs that are available, and we have concluded that the use of principal reduction within the context of a loan modification is not going to be the least-cost approach for the taxpayer.

In contrast, many leading economists believe that principal reduction programs could fulfill this goal while also serving the long-term interests of the taxpayers.  For example, appearing before the Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs, the President of the New York Federal Reserve Bank, William Dudley, testified:

We think that you can devise a program that, for home buyers that have mortgages that are under water, to incent them to continue to pay on those mortgages by giving them some program of principal reduction.  Obviously the devil’s in the details, so you have to have good program design.  But we are confident that one can design a program, which would be net beneficial—net positive—to the taxpayer.

At the conclusion of Rep. Tierney’s questioning, he asked you to provide both the statutory authority for your claim that you are prohibited from allowing principal reduction programs and the analysis you conducted demonstrating that principal reduction programs do not serve taxpayer interests.  He stated:

What you’re telling me flies in the face of all these people who have come up with a quite different idea. … I’d like you to do two things for the Committee if you would.  First, I want you to identify anywhere in the statute that specifically prohibits you from developing principal reduction programs. … [S]econd, I’d like you to submit whatever analysis you have done that shows why reducing the principal on some mortgages is worse for the United States taxpayer than foreclosure.

In response, you committed under oath to provide these documents, stating:  “We can provide that information as you suggested, Congressman.”

On November 30, 2011, all Democratic Members of the Committee wrote to follow-up on this request and to ask that you provide to the Committee “(1) the specific statutory provision you believe prohibits the Federal Housing Finance Agency (FHFA) from allowing Fannie Mae and Freddie Mac to reduce mortgage principal in all cases; and (2) the analysis you conducted, including the data you examined, demonstrating that principal reduction never serves the long-term interests of the taxpayer when compared to foreclosure.”

After receiving no response, we sent a letter to Committee Chairman Darrell Issa requesting that he issue a subpoena compelling the production of the requested documents.

CONCERNS WITH FHFA RESPONSE TO CONGRESS

On January 20, 2012, you sent a three-page response letter explaining your rationale for refusing to authorize principal reduction programs for mortgages owned or guaranteed by Fannie Mae and Freddie Mac and providing data you relied on in order to make your decision.   Although you did not include any original documents, you did include a summary of three sets of analyses you were provided in December 2010, June 2011, and December 2011.  Based on consultations with experts in the government and private sector, as well as a thorough review of the information you provided, we have numerous concerns with your response, each of which is addressed below.

Claim That Principal Reduction Does Not Serve Taxpayer Interests

In our opinion, the single most significant revelation in your letter to Congress is that, even based on your own questionable assumptions and data, principal reduction programs serve the taxpayer interests even when compared to your preferred alternative of forbearance.

Your letter concedes that both principal reduction and principal forbearance programs serve taxpayer interests by reducing the rates of default and the numbers of foreclosures.  Nevertheless, you argue that forbearance is preferable because it saves more money.  As you testified at the hearing on November 16, principal reduction “is not going to be the least-cost approach for the taxpayer.”

However, your letter and accompanying data demonstrate the opposite.  The analyses from December 2010, June 2011, and December 2011 confirm that, in light of the significant uncertainty underlying your assumptions, there is no effective difference between the estimated savings from these two approaches.  As the analyses concede, any perceived difference between the two is “negligible given the model risk.”

In fact, according to the latest report you provided from December 2011, which is based on the most recent data and up-to-date analyses, principal reduction programs actually save more money than forbearance programs.  Table 3 on page 19 of your letter indicates that Fannie Mae would save more money with principal reduction programs than with forbearance.  It shows that implementing principal reduction programs for borrowers who are Net Present Value (NPV) positive would reduce overall losses by $28.3 billion, while principal forbearance programs for these borrowers would reduce overall losses by $27.9 billion compared to the cost of taking no action.

If your estimates truly guide your decisions, it appears that you are disserving the American taxpayers by subjecting them to unnecessary and avoidable costs because you refuse to approve principal reduction programs.

One explanation you provide in your letter for not approving principal reduction programs is that they would require “changes to the existing IT systems, which are outdated and inflexible.”  We do not believe this is a valid justification for inaction, particularly since you did not even ask Fannie Mae or Freddie Mac to estimate the costs of adjusting their IT systems.

Claim That Principal Reduction Programs Would Cost $100 Billion

Rather than acknowledging that principal reduction programs serve the interests of American taxpayers, the first paragraph of your letter under “FHFA Considerations” included a highly inflammatory assertion implying that principal reduction programs could cost American taxpayers $100 billion.  You said this:

Putting this determination in context, as of June 30, 2011, the Enterprises had nearly three million first lien mortgages with outstanding balances estimated to be greater than the value of the home. … FHFA estimates that principal forgiveness for all of these mortgages would require funding of almost $100 billion to pay down mortgages to the value of homes securing them.

No Member of the Committee asked how much it would cost to pay down the mortgages of all three million mortgages backed by Fannie Mae and Freddie Mac that are currently underwater.  Nevertheless, your statement apparently had its intended effect of diverting attention from the questions we posed as news outlets immediately ran provocative headlines like “Mortgage Writedowns Could Cost Taxpayers $100B.”

To the contrary, your own data show that principal reduction programs would save taxpayers billions of dollars.  According to the data accompanying your letter, you examined borrowers with loan-to-value ratios exceeding 115% and concluded that taxpayers currently stand to lose an estimated $102 billion as a result of the defaults and foreclosures that will occur if no modification efforts are undertaken.  Your December 2011 analysis shows that implementing principal reduction programs would reduce these losses by $28.3 billion.

We have not identified a single press account in which you corrected the misimpression you created by suggesting that principal reduction programs would cost taxpayers $100 billion.  Beginning your letter with such a misleading statement trivializes the critical issues we are struggling to address and undermines your credibility and impartiality.

Statutory Authority Prohibiting Principal Reduction Programs

Your letter finally puts to rest the false argument that federal law prohibits FHFA from authorizing principal reduction programs for mortgages owned or guaranteed by Fannie Mae and Freddie Mac.

Your letter correctly references “three principal mandates set forth by Congress that direct FHFA’s activities and decisions.”  Your letter also correctly acknowledges that under the Emergency Economic Stabilization Act of 2008, “FHFA has a statutory responsibility to maximize assistance for homeowners to minimize foreclosures.”  Finally, your letter concedes that “FHFA did not conclude that ‘principal reduction never serves the long-term interest of the taxpayer’.”

What remains unclear, however, is why you have refused to exercise the authority Congress gave you to implement principal reduction programs.  As discussed above, your own data indicate that principal reduction programs would save taxpayers more money than forbearance programs in certain situations.

Your letter acknowledges that you might “reconsider” whether to authorize principal reduction programs “if other funds become available.”  This seems to be a reference to your ongoing efforts to seek additional taxpayer funds from the Treasury Department in order to provide incentives to mortgage servicing companies to conduct principal reduction programs.

Although additional incentives may be warranted in some cases, taxpayers have already provided $153 billion to Fannie Mae and Freddie Mac, and it is irresponsible and contrary to Congress’ direction for you to refuse to authorize principal reduction programs when they serve taxpayer interests today, according to your own data.  In other words, if your own data show that principal reduction programs would serve the interests of taxpayers now, you should implement these programs immediately and aggressively rather than holding out for additional funds from the Treasury Department.

In addition, as discussed below, a former Fannie Mae employee has informed us that a pilot program to initiate a targeted principal reduction program was vetted by agency legal counsel prior to receiving preliminary approval, yet it was cancelled by Fannie Mae officials on ideological grounds.  If this assertion is accurate, it suggests that the use of legal arguments to prevent principal reduction programs is misplaced and misleading.

Differences in Re-Default Rates

Based on input from numerous experts on housing policy, we have concerns about the assumptions used to estimate acceptance and re-default rates when comparing principal reduction programs to principal forbearance programs.  In particular, the assumptions underlying your analysis may underestimate the benefits of principal reductions and overestimate the benefits of forbearance.

First, your letter observes correctly that borrowers are less likely to re-default when they receive principal reductions compared to when they receive principal forbearance.  It states that the model you used “assumes that principal forgiveness reduces the rate of re-default on the loans to a greater extent than would forbearance.”

Similarly, an August 2010 staff report from the Federal Reserve Bank of New York agreed with this approach and stated:

We find that delinquent borrowers whose mortgages receive some modification have a strong tendency to re-default, but that different kinds of modifications have diverse effects on outcomes. … [T]he re-default rate declines with the magnitude of the reduction in the monthly payment, but also that the re-default rate declines relatively more when the payment reduction is achieved through principal forgiveness as opposed to lower interest rates.

The benefits of principal reductions may be understated in your analysis, however, since your hypothetical principal reduction program is not as sophisticated as programs proposed by experts or currently being implemented elsewhere.  For example, a number of principal modification programs include shared equity features that enable lenders or investors to recover a portion of appreciation in the home’s value.  In such programs, the “loss” from principal reduction may be less than otherwise assumed if the home is later sold at a higher value.

In addition, credible principal reduction programs typically seek to restore borrowers to positive equity positions and are likely to be more successful in obtaining borrower acceptance and preventing re-defaults.  According to your letter, however, you assumed only that principal would be reduced to 115% mark-to-market loan-to-value.  No data were provided comparing loans with loan-to-value between 101% and 115%, and no data were provided comparing modifications that reduce loan-to-value to any level other than 115%.

On the other side of the equation, it appears that the model used by FHFA to estimate the re-default rate for borrowers who receive forbearances may be overly optimistic.      In particular, the NPV tool appears to assume that if borrowers do not re-default within a given period of time (e.g., within one year), they will never re-default.  Such an assumption is highly suspect given projections that housing prices are likely to remain depressed for many years.  The failure to consider likely re-default rates over multiple years may skew your analysis to make forbearance appear more successful in preventing losses than it really is since many borrowers may be underwater for years.

Insufficient Detail to Evaluate Analyses

Your letter fails to provide any of the calculations made to generate the data presented in the tables that accompany the analyses.  In addition, it fails to provide definitions of key terms or to enumerate specific assumptions built into the models used to conduct the analyses.  The analyses appear to aggregate data from across 50 states and do not include any data on more narrow categories of borrowers, such as borrowers with loan-to-value between 115% and 125% or higher than 126%.  As a result, it is impossible to conduct a thorough analysis of the findings you have presented or to understand whether certain sub-sets of borrowers might benefit more than other borrowers from principal reduction programs.

INFORMATION FROM FORMER FANNIE MAE EMPLOYEE

A former employee of Fannie Mae has come forward to express concerns to us about your blanket refusal to authorize any principal reduction programs, even when those programs have been fully vetted by agency legal counsel and have the potential to save the American taxpayers billions of dollars.

According to this former employee, Fannie Mae officials conducted a significant amount of work developing a pilot program to test different principal reduction approaches and determine the most effective models.  As part of this effort, officials identified a major mortgage servicing company that was willing to become a partner in this program, analytical modeling was conducted by both Fannie Mae and the mortgage servicing company, consumer education materials were drafted, and a third-party counseling service was retained, according to the former employee.

This former employee has informed us that preliminary approvals for this pilot program were obtained from a variety of officials, including the Risk Subcommittee of Fannie Mae’s Executive Committee, as well as officials at FHFA and the Office of the Comptroller of the Currency.  The analytical teams at Fannie Mae and the mortgage servicing company also reportedly analyzed a host of factors, including the comparative risk of re-default with shared equity modification options.

According to the former employee, the purpose of the program was to develop “a responsible way to reduce principal balances for underwater mortgage borrowers without creating undue incremental moral hazard.”  As the former employee told us:

The thesis was straightforward:  the program would minimize losses for Fannie Mae versus conventional loss mitigation practices.  The analytical modeling done by both Fannie Mae and its pilot program bank/servicer partner supported this thesis.

According to the former employee, after six months of development work, and two weeks prior to its launch, the pilot program was cancelled in mid-2010 by senior executives in loss mitigation at Fannie Mae who were “philosophically opposed to writing down principal balances.”

The former employee informed us that dozens of officials were involved in this effort and that FHFA and Fannie Mae would have all of the documents relating to this pilot program, including all of the legal and analytical reviews that were conducted.

The former employee also explained to us the purpose of coming forward at this time, stating:  “I believe that we could be saving tens of billions of dollars while also helping stabilize housing prices and stimulating economic growth.”

If the allegations put forth by this former employee are accurate, it is unclear why you failed to include any of this information in your response to Congress.  Even if you subsequently questioned the data or assumptions relied on for this pilot program, your failure to disclose this information calls into question the completeness and accuracy of your response, as well as your motivation for continuing to oppose principal reduction programs.

REQUESTS FOR RESPONSES, DOCUMENTS, AND INTERVIEWS

In order to address the numerous concerns raised about your response to Congress and the new information provided by the former Fannie Mae employee, we request that you provide the documents requested below:

(1)    All documents relating to estimates of losses that would incur if all three million underwater mortgages owned or guaranteed by Fannie Mae and Freddie Mac were allowed to default without any modifications.

(2)    All documents relating to specific default assumptions in the NPV model used by FHFA to compare modifications that include principal reduction with modifications that include principal forbearance.

(3)    All documents relating to estimates of re-default rates for mortgages owned or guaranteed by Fannie Mae and Freddie Mac, including those that received modifications that include principal forbearance, disaggregated by loan-to-value level.

(4)    All documents relating to estimates of specific costs that would be associated with information technology upgrades needed to implement principal reduction programs.

(5)    All documents relating to analyses, if any, of the estimated consequences of reducing mark-to-market loan-to-value to levels other than 115%.

(6)    All documents relating to assumptions and estimates of the potential consequences of offering loan modifications, including forbearance or principal reductions, to borrowers who have mortgage insurance.

(7)    All documents relating to estimates of the number of mortgages owned or guaranteed by Fannie Mae and Freddie Mac that have mortgage insurance or second liens, as well as the share of potential gains from principal reduction programs that would go to unrelated beneficiaries as a result.

(8)    All documents, whether in draft or final form, relating to any pilot program developed by Fannie Mae relating to principal reduction modifications, including but not limited to:

(a)    records of communications, including emails, between and among officials at FHFA, Fannie Mae, the Office of the Comptroller of the Currency, and any outside parties including mortgage servicing companies and consulting firms, relating to such programs;

(b)    legal analyses conducted before, during, or after consideration of such pilot programs;

(c)    accounting or actuarial studies evaluating shared equity modeling or other aspects of such pilot programs, whether prepared by government entities or outside parties;

(d)    consulting, analytic, or other contracts or memoranda or agreement relating to such programs, as well as any products prepared pursuant to such contracts or memoranda of agreement;

(e)    consumer education materials prepared relating to such programs; and

(f)    agendas, briefing papers, minutes, summaries, or other documents prepared by, on behalf of, or after consideration of such programs by the Executive Committee, including but not limited to its Risk Subcommittee.

Please provide the requested documents by February 29, 2012.  To the extent that no documents exist that are responsive to these requests, we ask that you provide a substantive explanation in response to the specific issues raised in this letter.  Thank you for your cooperation with this request.

Sincerely,

__________________________________        __________________________________

Elijah E. Cummings                                        John F. Tierney

Ranking Member                                            Member

cc:    The Honorable Darrell E. Issa, Chairman
Committee on Oversight and Government Reform

source: http://democrats.oversight.house.gov

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Current Position Prevents Many Homeowners from Receiving Relief

BOSTON – Concerned that the refusal by Fannie Mae and Freddie Mac to engage in principal forgiveness and loan modifications for struggling homeowners is slowing the nation’s economic recovery, Attorney General Martha Coakley has sent a letter urging Fannie and Freddie to reverse this stance.

Leaders of Fannie Mae and Freddie Mac have expressed an unwillingness to participate in federal loan modification programs, including principal forgiveness. In a letter  to the acting director of the Federal Housing Finance Agency (FHFA), AG Coakley insists that the FHFA should allow for principal forgiveness, guided by a net present-value analysis, which would increase loan modifications and help stabilize the housing market and economy. 

“More than five million people have lost their homes due to foreclosure in the past five years, and millions more on the brink of foreclosure, struggling to stay in their homes,” wrote AG Coakley.  “Fannie Mae and Freddie Mac should be a leader in the arena of loan modification best practices, not an obstruction.  Fannie Mae and Freddie Mac should change course to serve both their own interests and those of the public and the economy.”

[MASS.GOV]

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NEWS RELEASE
For Immediate Release Contact:

Corinne Russell (202) 649-3032
January 23, 2012 Stefanie Johnson (202) 649-3030

FHFA Releases Analysis on Principal Forgiveness
As Loss Mitigation Tool

Washington, DC – In response to a request from members of Congress, the Federal Housing
Finance Agency (FHFA) has publicly disclosed the analysis that led the agency to exclude
principal forgiveness from its menu of loss mitigation tools. On Friday, FHFA delivered to
Representative Cummings, Representative Tierney and other members a letter summarizing
the agency’s determination and three separate staff analyses prepared over the past year that
formed the basis for the determination.

As requested, the information here provides the analytic and legal basis for FHFA’s previously
announced determination on the use of principal forgiveness as a loss mitigation tool. FHFA is
not seeking any legislative action in this area. FHFA remains committed to achieving its
statutory mandate to conserve the assets and property of Fannie Mae and Freddie Mac in
conservatorship while maximizing assistance to troubled homeowners, mindful of the net
present value cost to taxpayers. As FHFA has noted before and states in the letter, changing
circumstances may call for an updating of our analysis.

Background

Each month, FHFA reports on the full array of loss mitigation activities undertaken by Fannie
Mae and Freddie Mac, including loan modifications. Each quarter, FHFA reports on the
redefault rates on loan modifications. Those Foreclosure Prevention & Refinance reports may
be found here. Since establishment of the conservatorships, Fannie Mae and Freddie Mac have
modified more than one million mortgages and undertaken about 2 million foreclosure
prevention actions. Notably, the re-performance rate on loan modifications has improved
substantially as the modifications themselves now typically involve far greater reductions in
monthly payments than did modifications in the early months of the housing crisis.

When a homeowner owes more on their mortgage than the property is worth, this is typically
referred to as being underwater on a mortgage. Being underwater does not imply that a
borrower lacks the ability or the desire to make good on one’s financial obligation, nor does it
relieve a household from that responsibility. Indeed, FHFA estimates that, as of June 30, 2011,
Fannie Mae and Freddie Mac held 1.4 million mortgages with current loan-to-value ratios
above 115 percent. Of these, 1 million were current and 176,000 had been delinquent for more
than a year. For delinquent and deeply underwater borrowers, Fannie Mae and Freddie Mac
offer loan modifications that include principal forbearance, which means no interest is charged
on a portion of the underwater amount.

Finally, for underwater borrowers who remain current on their mortgage, last October FHFA
announced changes to the Home Affordable Refinance Program (HARP), which further
enhance the opportunity to refinance. These HARP changes allow these underwater borrowers
whose mortgages are owned or guaranteed by Fannie Mae and Freddie Mac to take advantage
of today’s lower mortgage rates and to shorten their mortgage term, which would enable
borrowers to get back above water more quickly.

###

The Federal Housing Finance Agency regulates Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks. These government-sponsored enterprises provide more than $5.7 trillion in funding for the U.S. mortgage markets and financial institutions.

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Washington, DC (Jan. 18, 2012) – Rep. Elijah E. Cummings, Ranking Member of the House Committee on Oversight and Government Reform, and Committee Member John F. Tierney sent a letter today to Chairman Darrell Issa requesting that he issue a subpoena to the Federal Housing Finance Agency (FHFA) compelling the production of all documents associated with its analyses of whether mortgage loan modifications with principal reductions should be offered by Fannie Mae and Freddie Mac. 

During questioning from Tierney at a Committee hearing on November 16, 2011, FHFA Acting Director Edward DeMarco testified that programs to reduce mortgage principal do not serve the long-term interests of taxpayers when compared to foreclosure. DeMarco testified that FHFA had conducted analyses supporting this conclusion, and he committed under oath to provide materials relating to these analyses to the Committee.

On November 30, 2011, Cummings and all Democratic Members of the Committee sent a letter to DeMarco requesting that he provide these documents by December 9, 2011. Despite numerous written and oral follow-up requests, however, DeMarco has failed to provide them to date.

“Given Mr. DeMarco’s failure to produce to the Committee the documents he committed under oath to provide and the call by Federal Reserve officials for the implementation of loan modification programs that include principal reduction to address the ongoing housing crisis, we believe we are left with no option but to compel Mr. DeMarco’s compliance,” Cummings and Tierney wrote to Issa. “For these reasons, we request that you issue a subpoena demanding these documents, or that you schedule a business meeting so Members may vote to authorize a subpoena in order to obtain these documents.”

Below is the full letter:

January 18, 2012

The Honorable Darrell E. Issa
Chairman
Committee on Oversight and Government Reform
U.S. House of Representatives
Washington, DC 20515

Dear Chairman Issa:

        We write today to request that you issue a subpoena to the Federal Housing Finance Agency (FHFA) compelling the production of all documents associated with its analyses of whether mortgage loan modifications with principal reductions should be offered by Fannie Mae and Freddie Mac.  During a hearing before the Committee on November 16, 2011, the Acting Director of FHFA, Edward DeMarco, committed under oath to provide these materials to the Committee.  Despite numerous written and oral follow-up requests, however, Mr. DeMarco has failed to provide them.

        During the Committee’s hearing in November, Rep. John Tierney asked Mr. DeMarco whether he had determined, as a matter of policy, that it was preferable to foreclose on properties rather than offer loan modifications that include principal reductions, even if foreclosures resulted in greater losses to FHFA and U.S. taxpayers than would be associated with principal reductions.  In response to Rep. Tierney’s question, Mr. DeMarco stated:

We have been through the analytics of the underwater borrowers at Fannie and Freddie, and looked at the foreclosure alternative programs that are available, and we have concluded that the use of principal reduction within the context of a loan modification is not going to be the least-cost approach for the taxpayer.

        At the conclusion of his questioning, Rep. Tierney asked Mr. DeMarco to provide both the statutory authority for his claim that FHFA is prohibited from allowing principal reduction programs, as well as any analysis that FHFA conducted demonstrating that foreclosures always serve taxpayer interests when compared to principal reductions.  Specifically, Rep. Tierney stated:

What you’re telling me flies in the face of all these people who have come up with a quite different idea. … I’d like you to do two things for the Committee if you would.  First, I want you to identify anywhere in the statute that specifically prohibits you from developing principal reduction programs. … [S]econd, I’d like you to submit whatever analysis you have done that shows why reducing the principal on some mortgages is worse for the United States taxpayer than foreclosure.

        In response to Rep. Tierney’s request, Mr. DeMarco committed under oath to provide these documents, stating:  “We can provide that information as you suggested, Congressman.”

        In order to follow-up on this request, all Democratic members of the Committee sent a letter to Mr. DeMarco on November 30, 2011, making clear what information he should provide to the Committee.  The letter requested that he produce:

1.      “the statutory provision you believe prohibits the Federal Housing Finance Agency (FHFA) from allowing Fannie Mae and Freddie Mac to reduce mortgage principal in all cases”; and
2.      “the analysis you conducted, including the data you examined, demonstrating that principal reduction never serves the long-term interests of the taxpayer when compared to foreclosure.”

        We requested that this information be provided by December 9, 2011, but Mr. DeMarco has failed to provide even a single document.  Minority staff have made repeated inquiries to Mr. DeMarco’s staff about the status of the document production, but they have failed to provide any indication of when he plans to comply.

        While Mr. DeMarco has failed to provide supporting documents demonstrating why a principal reduction program is not in the best interest of taxpayers, economists are increasingly announcing their support for such a program.  For example, over the past several months, officials with the Federal Reserve have made strong public statements supporting principal reduction.  On January 4, Federal Reserve Chairman Bernanke issued a white paper to Congress that stated:

Principal reduction has the potential to decrease the probability of default (and thus the deadweight costs of foreclosure) and to improve migration between labor markets.  Principal reduction may reduce the incidence of default both by improving a household’s financial position, and thus increasing its resilience to economic shocks, and by reducing the incentive to engage in “strategic” default (that is, to default solely based on the household’s underwater position rather than on the affordability of the payments).

On December 16, 2011, during a hearing before the Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs, the President of the New York Federal Reserve Bank, William Dudley, also called for implementation of a targeted principal reduction program to bolster the nation’s economic recovery and serve the long-term interests of U.S. taxpayers.  President Dudley explained:

[w]e think that you can devise a program that, for home buyers that have mortgages that are under water, to incent them to continue to pay on those mortgages by giving them some program of principal reduction.  Obviously the devil’s in the details, so you have to have good program design.  But we are confident that one can design a program, which would be net beneficial—net positive—to the taxpayer.

        The recent statements in support of principal reduction issued by Chairman Bernanke and President Dudley follow similar public statements issued by Neil Barofsky, former Special Inspector General for TARP; Alan Blinder, former Vice Chairman of the Federal Reserve; and Mark Zandi, Chief Economist, Moody’s Analytics.  

Given Mr. DeMarco’s failure to produce to the Committee the documents he committed under oath to provide and the call by Federal Reserve officials for the implementation of loan modification programs that include principal reduction to address the ongoing housing crisis, we believe we are left with no option but to compel Mr. DeMarco’s compliance.  For these reasons, we request that you issue a subpoena demanding these documents, or that you schedule a business meeting so Members may vote to authorize a subpoena in order to obtain these documents.

        If you have any questions, please contact Lucinda Lessley at (202) 225-5051.  Thank you in advance for your attention to this matter.  

Sincerely,

_________________________                         _________________________

Elijah E. Cummings                                               John F. Tierney

Ranking Member                                                   Member

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Washington, DC (Nov. 30, 2011) – Today, Rep. Elijah E. Cummings, Ranking Member of the House Committee on Oversight and Government Reform, and all Democratic Members of the Committee sent a letter to Edward DeMarco, the Acting Director of the Federal Housing Finance Agency, seeking documents he promised to produce to the Committee regarding his analysis of programs to reduce mortgage principal and why such programs never serve the long-term interests of taxpayers when compared to foreclosure.

“For too long now,” Cummings said, “we have heard superficial excuses about why principal reduction programs are not feasible at Fannie Mae and Freddie Mac, despite a growing chorus of economists and other experts who believe these programs serve the long-term interests of taxpayers.  Even though commercial banks have implemented their own principal reduction programs, FHFA stubbornly continues to favor massive waves of foreclosures.  It’s high time to see the actual data and analyses behind this policy, and to work towards new approaches that finally put American homeowners and our nation’s economy first.”

DeMarco committed to providing these documents during a hearing before the Committee on November 16, 2011, in response to questioning by Representative John Tierney, who pointed out that several banks are already implementing principal reduction programs that serve their financial interests while providing assistance to homeowners.  The Members requested that DeMarco provide the documents by December 9, 2011. 

The full letter follows:

November 30, 2011

Mr. Edward DeMarco
Acting Director
Federal Housing Finance Agency
1700 G Street NW
Washington, D.C. 20551

Dear Acting Director DeMarco:

            During the Committee’s hearing on November 16, 2011, you agreed to provide the Committee with:  (1) the specific statutory provision you believe prohibits the Federal Housing Finance Agency (FHFA) from allowing Fannie Mae and Freddie Mac to reduce mortgage principal in all cases; and (2) the analysis you conducted, including the data you examined, demonstrating that principal reduction never serves the long-term interests of the taxpayer when compared to foreclosure.  We are writing to request that you provide these documents by December 9, 2011.

            When you were asked about statutory prohibitions against principal reduction programs, you responded:  “I believe that the decisions that we’ve made with regard to principal forgiveness are consistent with our statutory mandate.”  Although you were not asked about providing “general support” to the housing market, you also said this:  “I do not believe that I’ve been appropriated taxpayer funds for the purpose of providing general support to the housing market.”  During your testimony, however, you identified no specific statute that prohibits FHFA from allowing Fannie Mae and Freddie Mac from developing principal forgiveness programs in select cases that would serve the long-term interests of both taxpayers and homeowners.

            As Rep. John Tierney explained, when Congress enacted the Emergency Economic Stabilization Act in 2008, it specifically directed FHFA, Freddie Mac, and Fannie Mae, among other things, to “implement a plan that seeks to maximize assistance for homeowners.”  Many economists believe that principal reduction programs could fulfill this goal while also serving the long-term interests of the taxpayers who are funding Fannie Mae and Freddie Mac.  They include the following:

• Federal Reserve Chairman Ben Bernanke:  “In this environment, principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure.”

• Martin S. Feldstein, former Chairman of the Council of Economic Advisers under President Reagan:  “To halt the fall in house prices, the government should reduce mortgage principal when it exceeds 110 percent of the home value.”

• Alan Blinder, Former Vice Chairman of the Federal Reserve:  “Most economists see principal reductions as central to preventing foreclosures. … Perhaps the cost to taxpayers could be reduced by giving the government—or even private investors—some of the upside when house prices finally start climbing.”

• Neil Barofsky, former Special Inspector General for the Troubled Asset Relief Program:  “There needs to be a recognition that many borrowers will never make the required payments on their underwater mortgages, and that the owners of these mortgages have already lost any meaningful chance of obtaining a full recovery of the outstanding principal.  The sooner that this reality is recognized and addressed, the sooner a recovery can take hold.  As such, an aggressive principal reduction program is necessary.”

          During your testimony, you stated that you had completed a thorough analysis of why foreclosures always serve the interests of taxpayers better than principal reduction programs.  Specifically, you stated:

We have been through the analytics of the underwater borrowers at Fannie and Freddie, and looked at the foreclosure alternative programs that are available, and we have concluded that the use of principal reduction within the context of a loan modification is not going to be the least-cost approach for the taxpayer.

          As Rep. Tierney noted, however, several banks are already implementing principal reduction programs that serve their financial interests while providing assistance to homeowners.  For example, Ocwen has established a program under which a servicer may reduce a loan to 95% of a home’s fair market value, and the excess principal is forgiven over three years as long as the homeowner remains current on mortgage payments.  When the home is sold or refinanced, the borrower is required to share 25% of the appreciated value with Ocwen.  According to the company’s CEO:

Shared appreciation modifications help homeowners avoid foreclosure and restore equity, providing a significant benefit to the customer, the economy, and the housing market.

          Other banks also have principal reduction programs, including JPMorgan Chase, Ally Financial, Bank of America, and Wells Fargo, which reportedly reduced the balances of approximately 73,000 borrowers by an average of $51,000 in 2009 and 2010.

          At the conclusion of Rep. Tierney’s questioning, he asked you to provide both the statutory authority for your claim that you are prohibited from allowing principal reduction programs and the analysis you conducted demonstrating that foreclosures always serve taxpayer interests when compared to principal reductions.  He stated:

What you’re telling me flies in the face of all these people who have come up with a quite different idea. … I’d like you to do two things for the Committee if you would.  First, I want you to identify anywhere in the statute that specifically prohibits you from developing principal reduction programs. … [S]econd, I’d like you to submit whatever analysis you have done that shows why reducing the principal on some mortgages is worse for the United States taxpayer than foreclosure.

          In response, you committed under oath to providing these documents, stating:  “We can provide that information as you suggested, Congressman.”

          We are writing to request that you provide this information by December 9, 2011.  If you have any questions, please contact Davida Walsh at (202) 225-5051.  Thank you for your cooperation with this request.
Sincerely,
Elijah E. Cummings                                                       Edolphus Towns
Ranking Member                                                          Member
Carolyn B. Maloney                                                     Eleanor Holmes Norton
Member                                                                       Member
Dennis J. Kucinich                                                        John F. Tierney
Member                                                                       Member          
Wm. Lacy Clay                                                            Stephen F. Lynch                                            
Member                                                                       Member
Jim Cooper                                                                  Gerald E. Connolly
Member                                                                       Member
Mike Quigley                                                                Danny K. Davis                                               
Member                                                                       Member
Bruce Braley                                                                Peter Welch
Member                                                                       Member
John Yarmuth                                                               Christopher S. Murphy                        
Member                                                                       Member
Jackie Speier
Member

cc:        The Honorable Darrell E. Issa, Chairman
            Committee on Oversight and Government Reform

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source: http://democrats.oversight.house.gov

 UPDATE: Via our friend Martin Andelman (Mandelman Matters) “I am told this is from a homeowner sending something in to be considered and would have to be sponsored in order to move through committee, etc.” Just so you all know, he made a few calls and found out.

The Attorney General of California has prepared the following title and summary of the chief purpose and points of the proposed measure:

HOME MORTGAGE MODIFICATION. INITIATIVE CONSTITUTIONAL AMENDMENT. Makes home ownership fundamental right. Prohibits lenders from foreclosing on California citizen’s personal home. Requires lenders to assist California borrowers not paying on home loans due to financial hardship or illness. Requires lenders to reduce home loan principal to reflect drop in local property value if more than 10 percent, and to reschedule payments, reduce interest rates, and/or refinance without new credit review. Requires lenders to refinance home loans at minimum cost within 45 days of request if loan has been maintained for three years. Provides back property tax assistance to homeowners. Summary of estimate by Legislative Analyst and Director of Finance of fiscal impact on state and local governments: The fiscal impacts of some provisions of this measure are uncertain because of potential conflicts with provisions of the U.S. and State Constitutions and federal laws and regulations governing federally chartered lenders. Potential losses to local governments up to a few billion dollars annually in revenues from property taxes and other types of fees and assessments. Potential state costs up to the low billions of dollars annually to replace the loss of property tax revenues now used to meet the Proposition 98 education funding requirement. (11-0014)

[ipaper docId=68796943 access_key=key-1jtklx95x3afktjxfasx height=600 width=600 /]

Sierra Vista Herald-

As millions of Americans struggle in foreclosure with little hope of relief, big banks are going to borrowers who are not even in default and cutting their debt or easing the mortgage terms, sometimes with no questions asked.

Two of the nation’s biggest lenders, JPMorgan Chase and Bank of America, are quietly modifying loans for tens of thousands of borrowers who have not asked for help but whom the banks deem to be at special risk.

Rula Giosmas is one of the beneficiaries. Last year she received a letter from Chase saying it was cutting in half the amount she owed on her condominium.

Continue reading [THE SIERRA VISTA HERALD]

Lets not act surprised in this as we always knew there was something cooking behind the scenes and not everyone agreed and probably disappointed with the approach Tom Miller from Iowa was heading.

WaPO-

HuffPO-

The nation’s largest mortgage companies are operating on the assumption that they will have to pay as much as $20 billion to resolve claims of widespread foreclosure abuse, an amount four times what they had originally proposed, the top federal official overseeing the discussions told state officials Monday, according to people who participated in the conversation.

Associate U.S. Attorney General Tom Perrelli told a bipartisan group of state attorneys general during a conference call that he believes the banks have accepted the realization that a wide-ranging settlement to the months-long probes will cost them much more than the $5 billion offer they floated last month, according to officials with direct knowledge of the call. Perrelli said he’s basing his belief on his recent conversations with representatives of the five targeted firms: Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial.

NOTE: We’ll take the $17 Billion over the AG’s “settlement”!

If settlement happens, they SHOULD prohibit any of them from coming at you with a deficiency!

WSJ-

State attorneys general told the nation’s five largest banks on Tuesday they face a potential liability of at least $17 billion in civil lawsuits if a settlement isn’t reached to address improper foreclosure practices, according to people familiar with the matter.

The figure doesn’t cover additional billions of dollars in potential claims from federal agencies such as the Department of Housing and Urban Development and the Justice Department. State and federal officials haven’t proposed a specific comprehensive settlement figure, but Tuesday’s …

REUTERS-

American Home Mortgage Servicing, one of the largest subprime mortgage servicers, is urging the U.S. Treasury to organize a plan to boost principal reductions for up to 1 million homeowners by unlocking loans from securities.

The servicer is asking for amendments to contracts that govern treatment of delinquent loans in mortgage securities. Currently, most contracts don’t allow sales of loans prior to foreclosure, and in many cases don’t permit a servicer to lower principal when a loan is modified.

Read this post below for further explanation to this craziness…

AZ Rep. Seel Drops Amendment Requiring Pre-Foreclosure Chain of Title, 2 Days After Servicer Grants Principal Reduction

CreditSlips-

Warning: This is a long blog post. But if you follow mortgage servicing, I think you’ll find it worth reading. Despite lots and lots of media coverage of the servicing fraud settlement, nobody seems to understand the real story that’s going on. I think that this post will explain a lot.

Let’s start by recapping what we know.  Back in March we started hearing media reports of a proposed penalty for servicers in the $20-$30B range.  Then the American Banker published a 27-page term sheet from the AGs for servicing standards. Next, Huffington Post published a 7-page CFPB powerpoint presentation. Then came the draft C&D orders and then in April, the final C&D orders (which eliminated the ridiculous “single point of contact which need not be a single person” and replaced it with “single point of contact as hereinafter defined” and then failed—quite deliberately—to define it anywhere in the document).

Now there’s another round of activity and conflicting reporting. The American Banker reported that there was a new AG term sheet proposed and that principal reductions were off the table. That turns out to be incorrect, as Shahien Nasiripour reported in the Huffington Post. The new AG term sheet that the American Banker referenced deals only with servicing standards. The American Banker assumed that this mean that principal reductions were off the table because they weren’t referenced in the term sheet. In fact they are still very much in play. They’re just in a second, separate term sheet. So now there are two separate term sheets–one covering servicing standard and another covering monetary issues/principal reductions. (Recall that the original AG term sheet did not cover the monetary issues—that was clearly for a separate document.) We are also hearing news reports that the banks are offering to settle for $5B and won’t go above $10B.

So how do we make sense out of all of this?

For those of you that disagree, please read this post to understand why this makes perfect sense…

HuffPo-

The nation’s five largest mortgage firms may be forced to reduce loan balances for distressed homeowners as part of an agreement with state attorneys general and the Obama administration to settle claims of faulty mortgage practices, a top state official involved in the negotiations said Tuesday.

Another Exclusive from Mandelman

Remember Arizona’s Senate Bill 1259 that would have required servicers to produce a declaration that they had the proper chain of title prior to foreclosing on someone’s home?  You know… the one that passed the Arizona Senate 28-2 that I wrote about back on February 23^rd of this year?

Remember maybe a month ago when I tried to follow up to see how the bill was proceeding in the Arizona House of Representatives… only to find out that on the way to the House… it disappeared… the text replaced by some bill about firefighting with the same number?  And no one was saying a word about it?  If you missed it, I wrote about it here.

Okay, well… it appears that the story is not over yet.

BLOOMBERG

Oklahoma Plan

Oklahoma Attorney General Scott Pruitt is seeking an alternative settlement with banks that respects “the appropriate role of attorneys general,” his office said in a statement today. The settlement could be a model for other states, Pruitt said.

BLOOMBERG– David McLaughlin and Prashant Gopal

Georgia Attorney General Sam Olens said he has “significant concerns” about a proposal to reduce loan balances for some homeowners as part of a settlement of a nationwide foreclosure probe, joining at least seven other states that have criticized such a plan.

A deal with the top mortgage servicers in the U.S. that includes writedowns could encourage homeowners who are current on their loans to stop making payments, Olens, a Republican, said today in a telephone interview.

“You’re declaring in advance who the winners and losers are,” Olens said. “I’m a little concerned that this process disengages the normal market forces.”

Why they should be FORCED.

Take this home for example. It was originally sold for $289,000.

Prior to Final Judgment, property had two (2) assignments of mortgage for two entities same robo-signer for both via MERS.

At auction it was sold for a MAJOR discount at approx. 75% off. to Indymac via LPS Minnesota address in 2010. We know Indymac has been shut down way before this time.

Why couldn’t they work a deal like this when this person whom I personally know tried over and over to get a modification AT THE TIME?

They had a good job then and still have a good job today.

So why do they not want to work with the borrowers and reduce the principal to reflect today’s REAL and TRUE appraisal of the property?

Make sure you follow the transactions to understand what happened and why it makes no sense where this goes.

Now Here comes more funny business:

Still following?

• Property was Quit Claimed/Transferred To Freddie Mac for $100.00 (prepared by David Stern) but consideration shows only $10.00.
  
• Property then sold for $3900.00 more 13 days later $78,000
  
• SAME day flipped for $150,000
• Previous records are all gone [compare both images]
  

Don’t forget…

IS LPS’s Aptitude Solutions Software In Your County Courts & Land Records???