No principal reduction for underwater Fannie and Freddie borrowers

July 31, 2012 04:30PM

The acting head of the Federal Housing Finance Agency told Congress that the “anticipated benefits” of Obama’s Home Affordable Modification Program Principal Reduction Alternative do not outweigh the risks, Forbes reported.

Edward DeMarco, controversial acting director of the FHFA, which took over conservatorship for Fannie Mae and Freddie Mac in 2008, said that the two government sponsored enterprises will not participate in the program, which would allow underwater borrowers to write down what they owe.

Treasury Secretary Timothy Geitner disapproved, telling Congress that “as we have discussed many times, the use of targeted principal reduction by the GSEs would provide much needed help to a significant number of troubled homeowners, help repair the nation’s housing market, and result in a net benefit to taxpayers.”

In the past, DeMarco has said he was hesitant to grant principal reductions, Fannie and Freddie have been barred from allowing since DeMarco took over, because he believes it creates an incentive for borrowers to default. [Forbes] — Guelda Voien