Journalism in the Public Interest

Fannie and Freddie’s Regulator Opposes Reducing Mortgages for Struggling Homeowners

The regulator for the government-controlled mortgage giants won’t let them trim loans for homeowners who owe more than their home is worth.


A housing development in Tucson, Ariz. (Chris Hondros/Getty Images)

Dec. 20: This post has been corrected.

The Obama administration has been pushing for banks and investors to cut mortgage balances for homeowners who owe more than their home is worth. But the regulator for the biggest investors of them all -- the government-controlled Fannie Mae and Freddie Mac -- won't let the two do it.

The administration and some banks themselves have increasingly seen reducing the size of a borrower's loan -- what's known as principal reduction -- as an important tool for helping the quarter of all homeowners who are underwater on their mortgages. The Treasury Department told ProPublica that the imbalance between what borrowers owe and what their homes are worth is one of the "main causes" of homeowners defaulting on their loans.

The administration sees principal reduction as a win-win, keeping families in their homes and allowing owners of the mortgages to recoup more money than they would through foreclosures. The logic is that if homeowners owe closer to what their home is actually worth, it decreases the likelihood they will default on the loan even after its modified.

Fannie and Freddie would seem to be the perfect players to promote principal reduction to prevent foreclosures. They're under government control, and they own or guarantee about half of the country's mortgages, meaning they pay the loss if a homeowner defaults. Because of that dominance, they also set the tone for how companies manage, or "service" in industry parlance, delinquent loans.

Source: Freddie Mac. Data as of June 30, 2010

John Taylor, the head of the nonprofit National Community Reinvestment Coalition, says Fannie and Freddie could easily and quickly affect the overall housing market. "They have the greatest authority and portfolio to make an impact," said Taylor. There are tens of thousands of loans "they can take care of tomorrow," he said.

But data show that Fannie and Freddie don't reduce principal, even if it might save them money in the long term. The reason: Their regulator won't let them. (The regulator, the Federal Housing Finance Agency, declined to comment.)

Fannie and Freddie, the two Government Sponsored Enterprises, or GSEs in industry lingo, have been under government conservatorship since the summer of 2008, when they nearly collapsed in the housing crisis. Since then, Treasury has pumped over $150 billion into the agencies, adding more funds nearly every quarter. Fannie and Freddie stand to cost taxpayers more than the rest of the bailout combined.

Their regulator, the FHFA, is responsible not only for overseeing Fannie and Freddie's broad mission to support the U.S. housing market, but also for making sure Fannie and Freddie conserve their funds in the short term to wean themselves off government support. These two roles can run counter to one another. In this case, reducing principal for some homeowners could add stability to the housing market and save Fannie and Freddie money in the long term, but it would also force them to take an immediate hit to their balance sheets.

"They've got a different set of objectives, in some way, different constraints," Treasury Secretary Timothy Geithner told a congressional panel yesterday, who nevertheless is encouraging FHFA to accept principal reduction.

Laurie Goodman, senior managing director at Amherst Securities, a brokerage firm that specializes in mortgage securities, said private investors generally support mandatory principal reductions, but Fannie and Freddie have short-term pressures that will limit their interest. "A conservatorship ... conserves assets," she wrote in a report this summer, where she predicted that Fannie and Freddie will not likely accept principal reductions in the future.

The regulator's aversion to principal reduction is "short-sighted," says David Stevens, the commissioner of the Federal Housing Administration, which runs a principal reduction program.

The government should focus on making sure modifications are sustainable so homeowners don't default again down the road, says Sen. Ted Kaufman, D-Del., chair of the Congressional Oversight Panel. He says what you don't want to do "is start using taxpayers' money to modify loans, and then have them go belly up. That is clearly the worst case."

A Freddie Mac spokesman deferred comment to the FHFA, and Fannie Mae spokeswoman Amy Bonitabus said, "We are continuously reviewing our policies regarding the modification of mortgages based on changing economic circumstances and our analysis of whether the policies are working."

Industry insiders say they see a double standard, with Treasury encouraging the private sector to do principal reduction without forcing Fannie and Freddie do the same. They "sometimes seem the last to take action," said one servicing executive.

This year, Treasury pledged billions of dollars to three programs to help both current and delinquent borrowers who are underwater on their mortgages. (Check out our overview of the programs.) Each program is structured differently to try to prevent what critics call a "moral hazard," where homeowners fall behind on their mortgage just to qualify for the reductions.

Fannie and Freddie are not participating in any of them.

The Wall Street Journal reported last week that the Obama administration has been pressuring the FHFA to allow Fannie and Freddie to reduce principal, and that they are "in talks" about joining the program that targets borrowers who aren't behind on their loans. Yesterday Geithner testified that he was "hopeful that they're going to find a way to participate in many of these programs as possible." Industry analysts, however, have expressed doubts that the talks will have much impact. Congressional Republicans have been particularly vocal in pressuring the FHFA against doing principal reduction.

Even though President Obama appoints the head of the FHFA, the president's authority to exert control ends there because the regulator is an independent federal agency. Congress, however, can pass legislation forcing the FHFA to allow principal reductions. Credit Suisse analysts wrote last week, "Given the current make up of Congress, it would be difficult to get a borrower bailout law approved, in our view."

Treasury has been "uber-strong" in its support of principal reduction, according to Lon DeWeese, the chief financial officer of the Nevada housing agency that runs the state's Treasury-sponsored program that includes principal reduction.

Meanwhile, banks have also been seeing the benefits in reducing principal in certain cases as well. Indeed, nearly all principal reductions that occur happen for the loans banks hold on their own portfolio, where they have the fewest obstacles to the modifications. Over the last year, banks have used principal reduction on almost a third of modifications on loans they own, according to ProPublica's analysis of regulator's data.

Source: OCC's Mortgage Metrics, covering July 2009 through June 2010

Wells Fargo and Bank of America, for example, have both agreed to consider principal reductions in the Treasury's main loan modification program, but only for loans that they own outright. One bank executive said that their internal analysis predicts that a "good percentage" of their government modifications will soon involve principal reduction, since the calculations indicate that they will recoup more money by reducing principal.

"If it's good enough for their own balance sheets, where the banks have the risk, why wouldn't it be good enough" for Fannie and Freddie, asked FHA Commissioner Stevens.

Investment analyst Goodman said the calculations for Fannie and Freddie can differ from the rest of the market because Fannie and Freddie have financial arrangements that force other companies to cover losses for some defaulted loans. Many of their delinquent loans have mortgage insurance, which requires insurance companies to cover the loss when borrowers lose their homes. Doing a principal reduction also limits Fannie and Freddie's ability to recoup their losses by forcing lenders that originated the mortgages to buy back bad loans.

Even if not every underwater loan qualifies, the administration thinks "there's a pretty good economic case for Fannie and Freddie to participate in those programs," Sec. Geithner testified yesterday.

For example, the voluntary "Principal Reduction Alternative" to Treasury's main loan modification program encourages adjustments only where reducing principal costs less than letting the home go to foreclosure or than doing a modification that doesn't trim the loan. But Fannie and Freddie are not participating, even though the program is only for principal reductions that would save them the most money.

The pressure to stem short-term losses means that over the long term, Fannie and Freddie might be leaving some money on the table.

"Our thinking was that maybe it is a bit myopic of the collective conservatorship to just say, 'No,' out of hand because of the immediate impact," Nevada's DeWeese said.

The administration acknowledges the tension between short-term and long-term demands, saying it tries to "strike a balance" between helping homeowners to prevent avoidable foreclosure and protecting taxpayer interests, said Treasury spokeswoman Andrea Risotto.

Homeowner advocate Taylor said he is upset that Fannie and Freddie aren't being forced to accept principal reduction because they "would be out of business tomorrow" without taxpayer funds.

Correction: This article previously stated that Fannie and Freddie are Government Sponsored Entities. It has been corrected to reflect that they are Government Sponsored Enterprises.

I filed a fraud complaint against Freddie a year ago with the FHFA.  I was shocked to find out that they had NO OIG office to investigate fraud and abuse.  I spoke to the secretary who sat alone in a room who dropped complaints in a box. 

I then called Freddie to ask if they were following federal fraud and abuse regulations and their answer was “NO.”

FHFA is completely dysfunctional.

Of course they won’t allow this, that would be too sensible. This whole deal is a crisis by design folks. It is on purpose, and any move to help ease the situation will be met with ferocious opposition. We need to fight back and be relentless. No other way will this be accomplished.

I think I read somewhere that voluntary foreclosures (i.e., people walk away not because they can’t pay, but because it doesn’t make financial sense to pay) are one of leading causes of foreclosures now ... if this is true, FHFA’s policy will only encourage this behavior and prolong the real estate crisis.

Nancy Steffen

Dec. 17, 2010, 4 p.m.

Not to mention that many of the big lenders are selling off non-performing loans for huge discounts to companies set up for that exact purpose who go on to foreclose or squeeze a little more money out of a dying borrower.

Why wouldn’t the lender discount it to be borrower via a principal reduction?

Wonder who greases who?


Dec. 17, 2010, 4:57 p.m.

Rich these people you are talking about already left there homes long time a go at the beguiling of the crisis (rich people Investors etc) The people that are left now struggling to pay their mortgage are honest middle class working people that got hit hard with the biggest ponzi scheme ever created by the Banksters

so here we have a “regulator” who fell asleep at the swtich and allowed the “regulatees” to blunder into a mess and now refuses to allow them to take corrective action. Why not replace the regulators or do they serve at the pleasure of someone besides the executive branch? If so, to whom do they owe fealty and if you say “the taxpayer” you are seriously deluded. The regulators are creatures of the bondholders despite their having placed those very holders at risk. This isnot to be believed.

What about the people who have done without anything the last two years in order to keep making their payments? Do they keep getting the crappy end of the stick so other people, saying they will walk away from their loan should get a decrease in principal? The people making the honest effort to pay, even when my job has evaporated, as long as my poor suffering wife finds a way to pay,  get nothing but a kick.

Excellent point Jeff! I’m with you in this. I feel you are either one who is willing to pay (whatever it might be and for whatever reason), or you just looking to beat the system. By now I think those who were not qualified to begin with (horrible though what some banks did to folks putting them into loans they knew they couldn’t afford) have already gone through the system. This whole thing is such a mess. What of those who have equity…but no job to repay and thus can’t qualify. Most likely this is just a mute point…as banks just aren’t really willing to help anyone!


Geoge W. Buxh and his Goldman Sachs buddy Hank Paulson, bucked and then cried like babies when a House bill rider was attached to Bush’s bankruptcy bill that would allow Bankruptcy judges to adjust loan balances on residential real estate occuppied by the owners who were petitioners.

JUST THINK: where we would be today if the monied interests that own the House, Senate, and White House had let the federal courts essentially shut down forsclosures.

MY GUESS: the housing market crah would not have happened or if it happened it would have affected less than 10% of the market and this recession would have ended in 2008 instead of just starting abd the taxpaters would not have been clipped for TARP.

GREED IS GOOD: now we’re in the throws of a double dip recession/depression that will not end for 10 to 15 years and will not even start to end until principal amounts of residential mortgaes are reduced to 90% of the current true valuation of the subject residential properties OR when it becomes less economical to just walk away with all the cash and buy your house back from the bank at half of what your mortage was when the house was foreclosed.

COVER UP: It is clear that if bankruptcy court had reduced the principal amounts, people or organizations that traded their US Dollars for phony paper would be screaming like Hell and the brokers whe fraudulently sold the garbage would be guests of the government.

UNFORTUNATELY: the choice was made to hide the crime and let the middleclass suffer.


FHFA’s website indicates that it is headed by a Director: there is no mention of a policy-making board.

At the moment, the Deputy Director is acting in the Director’s position, having been designated by President Obama in August 2009.

Generally, while permanent appointments at high levels require Senate confirmation, the President has discretion to designate acting officials.

In short, President Obama would seem to have substantial authority to influence FHFA policy.

Wow Folks Neat Stuff ...  I Think The native Indians that Helped our Settlers Treated Them Better Than Our Gov’t. & Manipulators Treat WE
Americans Today ...  Well, In the end, it Won’t be
About Greed !!!  I Heard that Money is not good
  It would Really Scare the Shit Out Of them If WE
Started Living Off The Land and Growing Gardens
With Heirloom Seeds To Feed Our Families &
  Livestock !!!!  Has That Been Done Before ???
  What About Smoothe Sweet Corn Liqour ? ! ?
  For Libation & Driving Our Machinery ??? Doesn’t
  Everyone Have A Grandpa Or Rent A Grandpa You
Can Quiz About These Simple Techniques ???
  That Is Unless A Little Sooner we Want To Form A Buy Back At ” Auction ” Group !!! 
  Re-sign The Notes To Home owners !!! Address Their Stresses & Set Backs !!!  Find Roomates &
Jobs And Run This Country From the Bottom Up !
  Call Everyone With BACKBONE & HONEST
Raise A Barn For Farmer JOE ...  Love Shawn !
    Perception is 85 % +/- !!!  You Can’t Move THAT
Rubber Tree Plant . ?  .    ” Oh Really ”  Shawny

Pretty amazing statistics on who owns the seriously delinquent properties. Looks like the FHFA and secondary market are much more responsible for the fall in real estate values than the banks or loan originators. Not surprising that the FHFA is a quasi-government agency. Why is it the administration can’t seem to get anything done with these quasi agencies? The most successful venture so far appears to be the GM turnaround. It is seriously time for a transfusion of new blood. There is no excuse for this lack of cooperation and short-sighted objections to continue. Fire them and replace them if they refuse to cooperate.

Rodger Hamer, MD

Dec. 18, 2010, 8:13 a.m.

I think it is time for giving up on the system. Think about all homeowners simultaneously stopping payments to the mortgage lenders, and instead depositing the payments in an escrow account until the criminals start doing what WE want them to do.

“Wells Fargo and Bank of America, for example, have both agreed to consider principal reductions in the Treasury’s main loan modification program, but only for loans that they own outright.”

Is this SERIOUS?  Isn’t part of the problem that many of these mortgages have been split-up and sold piece meal?  So, if we look behind the above statement what we’re really hearing is: There will be nothing we can or will do.

And they don’t have to do anything because they are not being FORCED to do anything.

“The regulator, the Federal Housing Finance Agency, declined to comment”....  what is this? he is a public servant and he is obligated to explain why…

Why should anyone have to take a principal reduction?  If a persons home value increased they would never sell if for less.  Homes and property are risky investmnets, period, and the value can rise and fall, just as a stock or bond.

What should occur is that loans should be modified at 40years with a fixed interest of 5% at the current principal, the monthly payment would be reduced from about $1073 for $200,000 to about $964 and the owner could remain in the house.  Or even a lower interest rate.

Otherwise, the person should walk away from the house and default.  It is not fair to the rest of the citizens that don’t fit the modification rules.  If you revalue one you should do it for every home in the US that has lost value.

PS-I concur…problem is the banks (servicers) are not even doing the mods. I bought at wrong time (June 2007) have almost $90k invested…underwater by almost $80k. All BoA wants to do is delay and ruin my credit. More than likely they are giving people no options but to walk away. Their actions are running this country into a position we will never recover from. I dread the day when the American $ is no longer the worlds standard. This housing bubble we just went through will look like a small pothole in comparison. The FED will not have enough printers or paper to shore up these “too big to fail” corporations.


Dec. 18, 2010, 10:34 p.m.

P S Your idea of 40 yrs low interest modification is great !
The Problem: Banks are servicers are reluctant to modified, why? they make a lot more money by foreclosing how? they collect insurance (AIG bailout) insurance they bought against the mortgage or the home going in to foreclosure (they designed this kind of mortgages to default) and or by sticking it to the homeowner with all kinds of unfair fees, interest, forced expensive insurance, etc
The Banks made money when they approved the mortgage, then made money when they sold the mortgage, then made money when they got their bailout, then made money when they collect the insurance (AIG) by foreclosing on top of all the extra fees that they collect from investors and borrowers, plus the cash money they received when they sell the property,
And the homeowner what does he make or get ? well he gets to be thrown in the street with all his family!
talking about wealth from bottom up !

I Truly Believe we Citizens Greatly UnderEstimate
The Power of We The People !!! Maybe Because we
all Got Complacent and Havn’t had anything to Stand up And Yell About Together in Unison !!!
  If ” We ” Really want to Make An Omlett “WE”
are Going to Have to BREAK SOME EGGS !!!

Well…if people can pay nothing - which is the exact amount that those delinquint are currently paying - WHAT is the point in “reducing principle amounts”??? 
Oddly, they want to take away the tax deduction for mortgage payments from people that DO pay their mortgage…yet they want to reduce the mortgage payments of people that pay nothing. 
I have a BETTER idea…both houses and the president give all the money they currently have - and 90% of their future earning to solving this problem - this falls inline w their reasoning ...w one tiny exception..its THEIR money that is taken for THEIR mistakes…not the taxpayer’s.

Some people will be foreclosed on no matter what. Foreclosure is not a new thing.

The NUMBER of foreclosures is new.
The NUMBER of predatory loans is new.
The NUMBER of predatory foreclosures is new.
And on and on.

Many people in this mess have sacrificed everything to keep their home and they are still close to losing it, because of ARMS that keep going up and fees being tacked on due to the servicer’s lies.

Servicers are holding on to foreclosed homes and then selling them AT A PROFIT. It is the taxpayer who is being ripped off from all fronts.

There is no easy solution. However, the status quo is not the solution. There has got to be a better way. Not cutting income taxes on the wealthy and using some of that money to help fix this mess might have been smart. But hey I don’t know if there is anyone in D.C. who is smart anymore. They are Wall Street sheep.


Dec. 20, 2010, 10:59 p.m.

Mr. whatever from Yesterday, 3:11 p.m
I would advise that before you write such ignorant comment get informed, So I am going to recommend you a few sources of information on top of swarmthebanks and “parallelforeclosure”, 4clouserfraud”, Foreclosure hamlet websites, to go see the movie documentary “inside Job” go to   read the books 13 Bankers by Simon Johnson and All the Devils Are Here, by Bethany McLean and Joe Nocera and last but not least read all the documentaries and reports (old and new) that appear here on Propublica with statistics dates, accurate numbers etc. After you do all this please write again here I would like to read your comments again once you are well inform
And here are some more books you should read
AfterShock, Robert Reich
The Big Short, Michael Lewis
Crisis Economics, Roubini
The End of Wall Street, Lowenstein
The Forgotten Man, Amity Shlaes
FreeFall, Joe Stiglitz
The Great American Stick-Up, Robert Sheer
The Great Depression Diary, Benjamin Roth
The HellHound of Wall Street, Michael Perino
On the Brink, Henry J. Paulson
The Quants, Scott Patterson
The Return of Depression Economics, Paul Krugman
Too Big To Fail, Andrew Ross Sorkin
Griftopia, Matt Tiabbi

Unhappy Texan

Dec. 21, 2010, 3:20 a.m.

And while you are at it, “Watever”, Matt Taibbi’s Griftopia (ISBN 978-0-385-52995-2,) listed at the bottom of acmodspecialists’ recommendations will be of great help to you.  You will see in chapter one how poorly informed people can literally create a mistakenly driven movement (based in wrong assumptions even if with the best of intentions).  But above all, pay good attention to Chapter 2 so so that you can have an educated opinion.  In spite of the occasional profanity, the writing is excellent.

O.K.  What about John Ross, “Unintinded Consequences ”  More importantly Look up the History of the world War 1 Bonus Army !!!  True story of our Gov. acting like Jerks and covering it Up. Not saying any more, Can’t Ruin the Story ...
anyway, the point that I Believe is we all “Except Whatever” are trying to get together on issues related to the governing body Fooling We The People For   75 Years +/- !!!  O.K.
  Here is the thing I thought About as I read all of my
Neighbors input on important Things ...  That is Folks that if the Electric Goes Off, how are we all going to get together on these Issues that have been Brewing for Years Now ?????  I almost think we are like our Forefathers Planning How they wanted A New Country Without the Greedy Queen?
I was at The Courthouse today About My Foreclosure/Bankruptcy and I looked around at the Fat Attorneys Scuffling Around and Said Happy Holidays to One of em .  He was so Snibbly, he couldn’t look up !!! So, Being The 4 cup of Coffee Aggressive Guy I Can Be I Stepped Up To Him and said Hello How is your Holiday ???  Funny Trying to peacefully interact with some Goofball That Screws Other People for A Living ...  They Sure Don’t want to look up Real Quick !!!  THIS IS ALL PLAYGROUND MENTALLITY !!!  WEASLES ARE WEASLES WHETHER THEY GOT THE TITLE OF SENATOR OR CEO WHO GIVES A SHIT !!! HOW MANY OF YOU SOLD OUT TO THEM AND STILL HAVE JOBS AT THE COURT HOUSE ????  I am
  Supposed To Play Nice With Others and Usually Do !  So I told The Pudgy Atty. I was Going Turkey Hunting Soon and those that Didn’t Know how to Feed themselves Off the land May Have Trouble Soon !!! You Should have seen the Look on His Face !!! Shawn…  Are we Headed For the Era of the Film ” The PostMan ” ?  Maybe Something In Between !!  Thanks Shawn .

Shawn-I’ve been following your posts…Dec. 18 3:15 am was one of your better ones. I believe U.S. $ is going downhill quickly also. Are we going to end up like Yugoslavia? You are onto something as far as working and living off the land (although those in the city might find it to be less accessible). I spent my early years (7-13) on an 880 acre farm. Raised by an elderly couple (she was 68 and he was 72 when we were first placed). We had 2 1/2 acre garden (YES, not a typo 2 1/2 acres), I milked 3 cows by hand morning and evening, 40 head cattle and 50 head hogs. We had an old model t engine hooked up to a grinder…made our own sausage and hamburger, nothing went to waste as we made even made head cheese, churned cream to make our own butter. Made lye soap, had indoor plumbing supplied by well water for all. Still had an outhouse, beehives, orchards, grapevines and 200 chickens. Fuel oil, coal and gas (for farm equipment) was delivered. Many months only time we left property was for Church services on Wed. eve and am & pm Sunday services. About as self sufficient as you could be (alas, except for electricity) so I know it could be done. Strange thing is, although it was isolated and hard work…it was one of the most satisfying times in my life.
Your advice of maybe picking the brain of an elderly person (adopt a grandpa) could only be helpful…as they have gone through similar times before. Direct me to the nearest co-op!!!

Roy, Thanks, I am just stating the obvious that very few people remember or didn’t Experience at all !  It Is Purely Yours and A Great Idea For Rent A Wise Grandma / Grandpa Co-Op !!!!!!! As you Said, the People That Shared That Experience With you were 68 & 72 Yrs. Old ...  Calm and Greatful & Loving !!!  Congrats !!! Life can be Much Less Complicated !!!
  I am Presently Trying to Figure out Getting Road Kill To Food Pantries and Homeless Shelters as I myself am Unemployed and May be Homeless Myself ! I See Opportunities Abounding To Help Others as we Figure out our own Paths !!!!  Thanks Roy, Lets do The Wisdom Co-Op !!! Network Be Kind and Help Others !!!!!  Merry Christmas to all With Beautiful Blessings !!!  Sincerely Shawn !

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