WASHINGTON (Reuters) - The regulator for Fannie Mae FNMA.OB and Freddie Mac FMCC.OB said on Tuesday it might make sense for the housing finance companies to write down loan principal under an Obama administration plan, but further study was needed.
The White House in January offered financial incentives to the two government-controlled mortgage market giants, which have been propped up with more than $150 billion in taxpayer funds, to help cover any increased costs they might face forgiving loan principal.
Edward DeMarco, the acting director of the Federal Housing Finance Agency, said a preliminary analysis showed the firms could save $1.7 billion under the plan to have Fannie Mae and Freddie Mac cut loan balances for so-called "underwater" borrowers who owe more than their homes are worth.
Delivering his remarks at a speech at the Brookings Institution, he said one aspect to be considered was that the program might encourage borrowers to strategically default to obtain aid, driving up the cost, and said that even if the companies saved money, taxpayers would still be on the hook for the financial incentives.
DeMarco also said the program would help only about one million borrowers, only a fraction of the estimated 11 million underwater U.S. homeowners nationwide.
"This is not about some huge difference-making program that will rescue the housing market," he said. "It is a debate about which tools, at the margin, better balance two goals: maximizing assistance to several hundred thousand homeowners while minimizing further cost to all other homeowners and taxpayers."
Before the incentives were on the table, DeMarco had maintained that Fannie Mae and Freddie Mac could provide as much relief to distressed borrowers at less cost to taxpayers through loan forbearance.
The two companies, which were seized by the government in 2008 as loan losses mounted, now finance about 60 percent of all new mortgages.
The plan DeMarco is considering would triple the financial incentives for principal relief offered by the Treasury Department under the Home Affordable Modification Program, and it would pay Fannie Mae and Freddie Mac as much as 63 cents for every dollar of mortgage debt they forgive.
The costs would be covered by the Troubled Asset Relief Program, the government's financial rescue fund.
By offering money from TARP, the administration hopes to overcome DeMarco's objections. As the conservator of the two companies, FHFA is charged with conserving the firms' assets.
DeMarco said FHFA estimated that the Treasury would need to provided $3.8 billion in incentives. Taking into account the savings for Fannie Mae and Freddie Mac, he said that would mean the net cost to taxpayers would be $2.1 billion, not counting the possibility that some borrowers could strategically default to obtain aid.
The regulator has promised to provide a final answer later this month on whether the incentives now make it worthwhile for Fannie Mae and Freddie Mac to write down loan balances.
DeMarco said his agency still needs to determine the program's likely operational cost and how it could track whether or not borrowers are strategically defaulting. It also needs to consider how the companies could work with mortgage servicers to develop technology and training to launch the initiative, he said.
The regulator has been under intense political pressure to allow Fannie Mae and Freddie Mac to forgive mortgage principal. Many Democrats argue the step would help lay a base for a housing recovery.
Representative Elijah Cummings of Maryland, who has taken the lead on the issue for Democratic lawmakers, said he was "encouraged" by DeMarco's speech, but added: "The jury is still out on whether he will act to serve both homeowner and taxpayer best interests."
Reporting by Margaret Chadbourn; Editing by James Dalgleish