Edward DeMarco said there were too many unknown risks and costs to merit participation. The FHFA was created in 2008 to govern Freddie Mac and Fannie Mae as they struggled to survive. A principal reduction tool was offered by the Obama administration to other mortgage originators in 2010 but was only extended to the two government agencies in January of 2012.
 
In its original assistance to resolve the housing debacle, the Treasury refused to offer principal reduction, saying the move would result in too high a cost for taxpayers. That, obviously, changed and was signified by the Treasury’s willingness to pay for some of the costs.
 
The analysis conducted by the FHFA showed that up to half a million homeowners might benefit from the principal reduction program but that not all would likely participate. Even if half that number participated, Freddie Mac and Fannie Mae would have saved about $1.8 billion.
 
Netting out the payments from the Treasury to the two government agencies to supplement participation in the program would leave a savings of about $500 million. Cutting principal instead of simply reducing the interest rate makes loans perform better according to some economists’ analysis.
 
But DeMarco says that even those savings would be offset by as few as 19,000 homeowners who were current on payments but chose to default strategically to qualify for a more generous relief program. The Obama administration has had some success with FHFA in allowing homeowners to refinance even if their home values are deeply underwater.
 
The DeMarco resistance comes just as the housing market is improving. If the market continues its upward track, further assistance may not be needed.

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