The Federal Housing Finance Agency, the entity that oversees Fannie Mae and Freddie Mac, recently released a study demonstrating that principal reductions for underwater homeowners would have a significant, positive effect on the housing market. The study also found that principal reductions would ultimately save American taxpayers $1 billion because borrowers would stay in their homes and continue to make payments, rather than default and leave those homes.
Even though his own agency released this study, FHFA Director Ed DeMarco stated on Tuesday that he would not authorize Fannie or Freddie to issue principal reductions, citing to the moral hazard and taxpayer risk created by such a program.
Secretary of the Treasury Geithner stated that DeMarco's decision was not the best decision for the country. I tend to agree with Secretary Geithner here. Principal reduction would go a long way towards easing the pain in the local housing market, particularly in Chicago where property values remain depressed.
What's more, we are seeing more principal reductions from lenders like Chase. If major servicers/lenders see the benefit to their bottom line, there is likely one for taxpayers as well. The only way to change the situation for homeowners whose loans are held by Fannie and Freddie would be to replace DeMarco. Unfortunately, in an election year with a partisan and gridlocked Congress, it is highly unlikely that a replacement could get confirmed by the Senate.
In the meantime, we'll have to continue to pursue creative solutions to the problem of foreclosures and underwater properties.