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VARbuzz: DeMarco blinks — says principal write-downs might work after all

FHFA acting director Ed DeMarco finally gave in to pressure from, well, everyone and said that principal reduction for underwater mortgages might be a good idea after all.

image The FHFA oversees Fannie and Freddie, and DeMarco had said that the two GSEs could not allow principal write-downs on loans they backed, arguing (at the time) that it would be too damaging to their bottom lines.

But an analysis of how DeMarco came to that conclusion found that the argument didn’t hold water. Pressure built — from Congress, the Obama Administration, homeowners, and more. But DeMarco wouldn’t budge, arguing that forgiving some of the debt of some underwater, delinquent homeowners wouldn’t be fair to the homeowners who were making their payments. Worse, it might entice owners who were keeping current into strategic default: They would stop paying so they could get a principal write-down.

But in a speech at the Brookings Institute today called “Addressing the Weak Housing Market: Is Principal Reduction the Answer?” DeMarco agreed that, on further analysis principal reduction might be better for Fannie and Freddie’s bottom lines.

Without modification, Fannie and Freddie would lose $63.7 billion on those loans. Thanks to an incentive from the Treasury, though (part of the HAMP program), principal reduction would only cost the GSEs $53.7 billion.

DeMarco stressed that these were preliminary findings (perhaps the math could change), and that strategic-defaulting homeowners remained a worry. Nor did this speech mean that FHFA is actually going to allow Fannie and Freddie to make changes. But it does indicate a significant change in DeMarco’s stance — and potentially good news for struggling homeowners.