Tensions Escalate as DeMarco, Geithner Argue Merits of Principal Reduction

by devteam August 1st, 2012 | Share

Edward J. DeMarco, Acting Director ofrnthe Federal Housing Finance Agency today again stated his opposition tornallowing Fannie Mae and Freddie Mac to participate in the Principal ReductionrnAlternative (PRA) of the Home Affordable Modification Program (HAMP).  DeMarco’s agency which acts as conservatorrnfor the two government sponsored enterprises (GSEs) has opposed principalrnreduction on the part of the two companies despite growing pressure fromrnCongress and the Department of the Treasury.</p

In a letter to the Chair and RankingrnMember of the Senate Committee on Banking, Housing, and Urban Affairs DeMarcornrebuffed an offer to use funds from the Toxic Asset Relief Program (TARP) tornassist borrowers and said, “After much study, I have concluded the Fannie Maernand Freddie Mac’s adoption of HAMP PRA would not make a meaningful improvementrnin reducing foreclosures in a cost effective way for taxpayers.”  He went on to say there are continuedrnimprovements that can be made to the GSEs loss mitigation and borrowerrnassistance efforts, specifically naming the further streamlining of refinancernopportunities, enhancing the short sale process, and reducing lenderrnuncertainty that could inhibit new lending.</p

Treasury Secretary Timothy Geithnerrntold DeMarco in a letter released to the media that he was concerned about thernregulator’s continued opposition and urged the acting director to reconsiderrnhis decision.   The Secretary said “I dornnot believe it is the best decision for the country because, as we have discussedrnmany times, the use of targeted principal reduction by the GSEs would providernmuch needed help to a significant number of troubled homeowners, help repairrnthe nation’s housing market, and result in a net benefit to taxpayers.</p

Geithner called FHFA’s numbers “selective”rnand said that the agency’s own analysis which it had shared with Treasury “hasrnshown that permitting the GSE’s to participate in the program could help up tornhalf a million homeowners and save the GSEs $3.6 billion compared to standardrnloan modifications.  GSE participation,rnhe said, would save taxpayers as much as $1 billion on a net basis.  </p

Geithner’s letter was accompanied by a five page memorandum in whichrnTreasury staff lays out their case for principal reduction.</p

There has been increasing friction between the Obama Administration andrnDeMarco over his handling of the conservatorships.  DeMarco, a holdover from the BushrnAdministration, has been acting director since 2009 because the Senate refusedrnto bring the current president’s nominee to the floor for a vote.  Administration insiders have blamed DeMarcornfor thwarting many of the president’s housing initiatives and there has been arnspate of on-line petitions organized by progressive political groups callingrnfor DeMarco’s resignation.</p

In his letter DeMarco restated his conviction that principal reduction wouldrnnot support his agency’s prime obligation as conservator; to preserve thernassets of the GSEs on behalf of taxpayers. rnHe said that the result of adopting the HAMP PRA for the GSEs couldrnresult in benefits that could be either positive or negative for taxpayers butrnany model-projected benefits could be offset by a number of costs and risksrnincluding the implementation costs for the GSEs and the servicers, opportunityrncosts, long term implications of weakening the reliability of the mortgagerncontract, and delayed resolution of ongoing modification negotiations.</p

Tomorrow we will take a detailed look at the justifications laid out by DeMarcornand Geithner for their differing viewpoints and no doubt here reactions fromrnthe administration and members of Congress. rn</p

From: Edward DeMarco
Tim Johnson and Richard Shelby
View Letter</p

From: Tim Geithner
To: Edward DeMarco
View Letter </p

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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