Dear Acting Director DeMarco:
We are writing in response to your Jan. 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 Nov. 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 Nov. 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 Nov. 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 Jan. 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 Nov. 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."
