Principal reductions could save FHFA $1.7 billion

Mortgage writedowns, if approved by the Federal Housing Finance Agency, could save Fannie Mae and Freddie Mac up to $1.7 billion, Bloomberg News reported.

Edward DeMarco, the FHFA head, said his agency would decide “in the next few weeks,” if it would allow Fannie and Freddie to perform the mortgage modifications. DeMarco is hesitating, because he does not want to create an incentive for lenders to default, he said in a speech yesterday at the non-profit the Brookings Institution.

DeMarco barred Fannie and Freddie from making principal reductions after his agency became the defacto regulator for the two government-sponsored enterprises in 2008 when they were thrust into U.S. conservatorship. Despite pressure from the Obama administration, the FHFA has resisted so far, calling principal reductions “too expensive.”

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DeMarco said he is still hesitant. “Will some percentage of borrowers who are current on their loans be encouraged to either claim a hardship or actually go delinquent to capture the benefits of principal reduction?” DeMarco asked.

The FHFA will announce additional measures to help troubled homeowners in the next few weeks, and those could include a program that would allow delinquent Fannie and Freddie borrowers to continue to live in their houses as renters after turning over the deeds, sources with knowledge of the matter told Bloomberg News. [Bloomberg]