Fannie Mae had seen benefits to lowering some home loans, documents indicate

Officials at government-backed mortgage giant Fannie Mae concluded years ago that the company could “reduce its losses substantially” by lowering loan amounts for some troubled borrowers, according to internal documents cited Tuesday by the top Democrat on the House oversight committee.

The new insights into Fannie Mae’s analyses about the potential benefits of so-called principal reduction surfaced in a letter from Rep. Elijah E. Cummings (D-Md.) to Edward J. DeMarco, the acting director of the independent agency that oversees Fannie Mae and Freddie Mac.

Since being appointed head of the Federal Housing Finance Agency (FHFA) in 2009, DeMarco has refused to allow Fannie and Freddie to write down loan balances, in part because he worries that some homeowners would stop paying their mortgages to get relief, ultimately costing taxpayers more money. He has been steadfast in his disapproval in recent months despite growing pressure from Obama administration officials and House Democrats to allow principal reductions.

In the letter, Cummings and another committee member, Rep. John F. Tierney (D-Mass.), cite documents provided by a former Fannie employee. They accuse DeMarco of withholding key documents from the oversight committee and of failing to mention Fannie’s findings during past testimony, in which DeMarco explained his reasons for opposing reductions in loan balances.

“We have very serious concerns about your public statements, your previous responses to us, and your failure to provide Congress with complete and accurate information about these important matters,” the two men wrote.

The letter details a specific pilot program that Fannie Mae officials considered creating in conjunction with Citibank beginning in 2009. Under the program, the loan balances of qualified homeowners would have been reduced to help them remain in their homes, with the homeowners agreeing to share any profits on the future sale of the home.

The letter cites presentations in which Fannie officials estimated that the program would cost $1.7 million, while the benefits could have saved more than $410 million. Despite its approval by a company risk officer in April 2010, the program was killed that July, and the documents provide no clear explanation why, Cummings said.

“This was not merely a missed opportunity, but a conscious choice that appears to have been based on ideology rather than Fannie Mae’s own data and analyses,” the letter asserted.

Cummings noted that in November 2010, after the pilot program had been suspended, some Fannie officials continued to make the case for principal reductions. He cited one 30-page research paper that concluded the firm “might reduce its losses substantially in many cases by writing down principal.”

The letter marks the latest in a long struggle by Cummings, other lawmakers and administration officials to persuade DeMarco to allow Fannie and Freddie to write down loans to help homeowners who owe far more than their homes are worth.

Later Tuesday, DeMarco responded to the two Democratic lawmakers with a letter of his own, expressing dismay over their suggestion that his motives were based on ideology and that the FHFA’s responses had been “anything but in keeping with the professionalism expected of this agency.” He also accused Cummings and Tierney of releasing “selective elements of the proprietary and confidential materials you received.”