"The debate over Washington's efforts to stabilize the troubled housing market escalated last week, as the Obama administration and the nation's top mortgage regulator butted heads over how to rein in foreclosures.
Housing and Urban Development (HUD) Secretary Shaun Donovan said his agency wants to encourage more principal write-downs to keep people in their homes, even when those loans are backed by Fannie Mae and Freddie Mac.
"There is increasing data available, we believe, that shows that… principal reduction can be good not only for homeowners and communities, but for investors as well," Donovan testified Wednesday before the Senate Banking Committee. "It can allow people to pay [their bills], stay in their homes and increase the value of those mortgages."
That feeling isn't shared, however, by the head of the independent agency that regulates Fannie and Freddie. Edward DeMarco, acting director of the Federal Housing Finance Agency (FHFA), told the same Senate panel that while he has the authority to reduce mortgage principal to prevent foreclosures, he won't use it because other tools are more effective.
Of the four primary foreclosure-fighting powers available to FHFA – reducing interest rates, extending the length of loans, principal forbearance and principal forgiveness – the last, DeMarco said, is the least valuable to regulators trying to repay the taxpayers who bailed out Freddie and Fannie more than three years ago.
"What FHFA has consistently found in its analysis is that the first three of those tools work better than the fourth one with regard to our fundamental mandate of conserving and preserving [Fannie and Freddie]," DeMarco said. "I've not said that we do not have the legal authority to reduce principal."
DeMarco's remarks drew quick condemnation from Democrats who, for months, have urged FHFA to push Fannie and Freddie to reduce principal loans to help struggling homeowners.
Rep. Anna Eshoo (D-Calif.) accused DeMarco of being a "shill" for lenders and "obstructing any kind of progress" in the housing market, which is widely considered to be a drag on the larger economic recovery.
"He was a shill for those who don't want to do anything, and I think he should go," Eshoo told The Hill Thursday. "He's not serving the American people and the president should get rid of him and replace him. … This isn't small potatoes."
Republicans have been quick to rush to DeMarco's defense. Sen. Bob Corker (R-Tenn.) praised the FHFA head for focusing on repaying taxpayers and hammered Democratic critics for lacking "the courage, the will [and] the desire to address these issues."
"You've tried to lay something out to begin the process," Corker said, "and here Congress has not done a single thing."
All sides agree that DeMarco's task is to maximize returns for Fannie and Freddie for the sake of the taxpayers who effectively own the mortgage giants, which the Treasury Department put into conservatorship in September of 2008. But they differ on how best to get that done.
DeMarco maintains that his focus on lowering monthly payments without principal forgiveness strikes the right balance between helping homeowners, protecting taxpayers and avoiding moral hazard. Critics contend that keeping people in their homes, even if it requires principal reduction, will stabilize the housing market more quickly, ultimately paying dividends for Fannie and Freddie.
Donovan noted this week that many commercial banks are offering principal forgiveness to mortgage borrowers. They wouldn't take that step voluntarily, the HUD secretary argued, if it wasn't in the best interest of shareholders.
"If banks are doing that with their own portfolios I think it shows that they've clearly made the decision it protects their own investments," Donovan said.