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Regulator defies White House, rejects mortgage plan

Chip Somodevilla / Getty Images file

Federal Housing Finance Agency Acting Director Edward DeMarco, left, listens to Fannie Mae CEO Michael Williams testify before the House Financial Services Committee's Oversight and Investigations Subcommittee on Dec. 1, 2011 in Washington, DC.

The official overseeing the vast pool of mortgages held by Fannie Mae and Freddie Mac has defied the White House and more than 100 members of Congress for the second time by formally rejecting a plan to use bank bailout funds to write down principal balances for underwater homeowners.

In the latest chapter in the long-simmering feud, Edward DeMarco, head of the Federal Housing Finance Agency, said Tuesday that offering relief to homeowners with bloated mortgages could encourage more people to default. The agency’s latest analysis defended DeMarco’s assertion that the White House plan would not stop enough foreclosures to be a cost-effective use of taxpayer funds.

"The anticipated benefits do not outweigh the costs and risks," DeMarco said in a letter explaining his decision.

Treasury Secretary Tim Geithner promptly shot back, urging DeMarco to reconsider his opposition.

"I do not believe it is the best decision for the country," Geithner told DeMarco in a letter. The White House plan would "provide much needed help to a significant number of troubled homeowners, help repair the nation's housing market and result in a net benefit to taxpayers."

DeMarco's latest decision also drew more ire from Democratic lawmakers who have pressed FHFA to write down mortgage balances.

"It is incomprehensible that Mr. DeMarco would reject the chance to save up to a billion dollars in taxpayer funds while helping nearly half a million homeowners stay in their homes," said Rep. Elijah Cummings, D-Md., one of Demarco’s most outspoken critics.

The conflicting analysis of the plan's impact reflect differing assumptions about how many struggling homeowners would apply for help and whether modifying their loans would save them from default. The debate has also been heavily influenced by political differences over whether tax dollars paid by homeowners who are keeping up with loan payments should be used to help others who are struggling.   

Even as the housing market has begun showing signs of bottoming after the worst collapse since the Great Depression, roughly one in every four homeowners with a mortgage owes more than their home is worth. Those “underwater” households represent a continued drag on home sales because their owners -- from growing families looking for more space to older people looking to downsize -- can’t afford to pay off their mortgage.

So far, the Obama administration’s efforts to prod lenders to write down underwater mortgages have fallen far short of expectations. With less than 100 days to the November election, the administration is eager to convince voters that it has made every effort to help ease the financial pain of the housing collapse and the resulting recession.

Obama’s Republican opponent, Mitt Romney, has argued that the government’s efforts have only prolonged the housing downturn and that the real estate market should be allowed to hit bottom to build a sustainable recovery.

Fannie Mae and Freddie Mac have received $190 billion in taxpayer funds to stay afloat after they were seized by the government in 2008 as losses on subprime loans drove them to the brink of insolvency. The Obama administration wants to use money from the Troubled Asset Relief Program, launched in 2008 to take bad mortgages of the books of big banks, to help struggling homeowners. Under the plan, the Treasury would pay Fannie and Freddie as much as 63 cents for every dollar of mortgage debt they forgive.

Opponents of the idea, led by DeMarco and supported by Congressional Republicans, argue that writing down mortgage balances with taxpayer funds is unfair to homeowners who are current on their payments. They also argue that the plan would create a “moral hazard” of encouraging more people to claim hardship or stop paying altogether, a process known as “strategic default.”  

Proponents, including the White House and more than 100 members of Congress from states hardest hit by the housing collapse, argue that the plan would benefit homeowners and the housing market, and it would save taxpayers money by reducing defaults on government guaranteed mortgages.

In his letter, Geithner argued that FHFA’s own data showed that the program would help nearly half a million homeowners and save taxpayers as much as $1 billion. That view was supported by a report in March by the FHFA’s inspector general, which concluded that Freddie Mac alone could save taxpayers “significant” sums of money if it pressed the companies servicing its mortgages to modify more loans.

The exact amount was redacted from the report at FHFA’s request.

Reuters contributed to this report.

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