AG Coakley, 10 Attorneys General Urge Fannie Mae, Freddie Mac to Implement Principal Forgiveness for Homeowners
Joint Letter Sent to FHFA Acting Director DeMarco Seeking Relief For Homeowners
BOSTON – Arguing that the failure to implement principal loan forgiveness in its loan modification programs harms struggling homeowners and investors, Attorney General Martha Coakley led a coalition of states in urging Fannie Mae and Freddie Mac to reverse its position. AG Coakley made her case in a letter sent yesterday to Edward DeMarco, Acting Director of the Federal Housing Finance Agency (FHFA) and was joined by 10 other states including California, Delaware, Illinois, Iowa, Maryland, Minnesota, New Mexico, New York, Oregon, and Vermont.
“The financial stability of Fannie Mae and Freddie Mac will not be harmed if they engage in principal forgiveness and according to new data could save close to $1.7 billion,” AG Coakley said. “We will soon see the results of the country’s largest banks implementing principal loan reduction as required under the recent Multistate Servicing Settlement. It is now time for the FHFA to accept the fact that principal forgiveness programs help borrowers, help communities and can improve the creditors’ bottom line.”
Given Director Demarco’s recent acknowledgment that principal forgiveness may be beneficial to both homeowners and investors, the letter advocates for swift implementation of principal forgiveness in federal loan modification programs. The letter argues there is no data to support the view that forgiveness conflicts with the goal of asset preservation. AG Coakley insists that forgiveness restores a borrower’s status as a stakeholder and provides them a stronger incentive to maintain payments.
In the letter, the Attorneys General argue that the increase of incentive payments to investors for allowing forgiveness under the Home Affordable Modification Program (HAMP) should also reduce concerns regarding the potential impact on the financial stability of Fannie Mae and Freddie Mac as either owner or guarantor of these loans. Additionally, the letter states that reluctance to engage in principal forgiveness based on the inability of internal computer systems to handle new programs is not an excuse as the nations’ largest banks overcame similar concerns after the Multistate Servicing Settlement reached last month.
As part of their argument, the Attorneys General write, “More than five million people have lost their homes due to foreclosure in the past five years, with millions more on the brink of foreclosure. Effectively resolving this foreclosure crisis is a key to restoring a healthy economy for our entire country. Because Fannie Mae and Freddie Mac own a majority of the nation’s home loans, they must be a leader in the arena of loan modification best practices, and not an obstruction.”
The FHFA has formally acknowledged that principal forgiveness can serve the long-term interests of taxpayers when compared to foreclosure by combining the goal of asset preservation and foreclosure prevention. According to Director DeMarco’s remarks to the Brookings Institution on Tuesday, an initial analysis of new incentives from the Treasury Department by the FHFA shows that Fannie Mae and Freddie Mac could save $1.7 billion if they applied principal forgiveness in its modification programs.
This is the second letter sent to Director DeMarco in just the past two months. In February, AG Coakley also insisted that the FHFA should allow for principal forgiveness which would increase loan modifications and help stabilize the housing market and economy. This new letter with additional facts, now backed by 10 additional Attorneys General, reflects a growing consensus around this issue.
In February, AG Coakley’s office participated in the national state-federal settlement over unlawful foreclosures that will bring $318 million in assistance to Massachusetts borrowers. The agreement settles many claims made as part of AG Coakley’s lawsuit against the five banks filed in 2011 but also allows the AG’s Office to continue to pursue claims against the banks for initiating illegal foreclosures and corrupting the Commonwealth’s land court system.
Through the agreement, five major lenders are expected to provide approximately $14.6 million in cash payments to Massachusetts borrowers, $257 million worth of mortgage relief, and a direct payment of more than $44.5 million to the Commonwealth that will be used to assist homeowners. The national agreement settles allegations of widespread use of fraudulent documents by Bank of America, Wells Fargo, JP Morgan Chase, Citi, and GMAC/Ally.