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FHFA Says Principal Reductions Would Cost Taxpayers $100 Billion

Anthony Randazzo
January 23, 2012, 5:23pm

There have been a number of calls for forced principal reduction as a means of addressing trouble in the housing market. Even the Fed earlier this month suggested serious consideration be given to breaking MBS contracts and forcibly reducing the principal on mortgages that are underwater. We've long highlighted that the negatives of this approach to housing problems far outweigh any positives. The FHFA has also pointed out the problems with principal reduction, and has held the White House at bay in attempts by the administration to prod the housing regulator into stepping outside its conservatorship legal guidelines. 

Now FHFA has produced analysis for the House Oversight Committee suggesting that a principal reduction program applied just to underwater loans held by Fannie Mae and Freddie Mac would cost the mortgage giants more than $100 billion. HousingWire has more on the story:

The FHFA disclosed the analysis conducted in 2010 in response to Democrats requests made last week. They asked House oversight committee chair Rep. Darrell Issa, R-Calif., to subpoena the agency since it failed to send the analysis as requested last year.

FHFA Acting Director Edward DeMarco has long said a principal reduction program on GSE loans would cost taxpayers too much. As of the end of the third quarter, Fannie and Freddie already owe a combined $151 billion in bailouts to the government.

"Given that any money spent on this endeavor would ultimately come from taxpayers and given that our analysis does not indicate a preservation of assets for Fannie Mae and Freddie Mac substantial enough to offset costs, an expenditure of this nature at this time would, in my judgment, require congressional action," DeMarco said in a letter sent to Rep. Elijah Cummings, D-Md., on Friday.

See the whole story here


Anthony Randazzo is Director of Economic Research


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