The U.S. regulator overseeing the bankrupt home loan financiers Fannie Mae and Freddie Mac told the New York Times that the companies are being pushed to accept losses to keep big private U.S. banks from writing down their holdings due to the avalanche of foreclosures over the past five years.
Edward Demarco, acting Federal Housing Finance Agency director, said policy makers are pushing his agency to allow Fannie Mae and Freddie Mac to reduce borrowers’ mortgage balance, deliberately shielding big banks from taking losses on distressed housing debt. He said it amounts to another stealth bank bailout.
Demarco argues that such a move amounts to a transfer of U.S. taxpayer wealth to the biggest U.S. lenders, whose “second mortgages” are subordinate to the debt owned or guaranteed by Fannie Mae and Freddie Mac. To protect taxpayers from further exposure to Fannie and Freddie REOs, it’s better to allow foreclosed homes to become foreclosure listings and sold on the open market.
“If you do principal forgiveness, who is it benefiting?” asked DeMarco, whose job is to minimize taxpayer losses on the government’s 2008 rescue of Fannie Mae and Freddie Mac. “Doing principal forgiveness is what would protect the big banks.”
Demarco sees the current push to force Fannie and Freddie to do principal reductions as a backdoor bailout for the banks. Nearly half of all the second mortgages are on the books of America’s four biggest banks by assets, including Bank of American, JPMorgan Chase, Wells Fargo and Citigroup.
Instead of mortgage write downs, DeMarco generally favors other types of loan modifications, like temporary cuts in monthly payments via a lower interest rate or a short sale.
To see how much write downs could cost U.S. taxpayers, you might want to take a look at a handy and very useful “Mortgage Write Down Calculator” created by Daniel Indiviglio at Reuters. The calculator allows you to see how much mortgage write-downs could cost U.S. taxpayers. Slide the bars over to the right and you begin to see how shocking the losses could be.
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