(Wall Street Journal) -- Fannie Mae’s chief executive said in an interview Wednesday that he doesn’t think the company should participate in programs to write down principal for homeowners who owe more than their homes are worth.
The Obama administration has offered to subsidize the cost of those write-downs, and Fannie’s federal regulator has weathered heavy criticism from Democrats in recent months for resisting modifications that forgive debt.
“Candidly, I think we’ve got the right tools now. Principal reduction is not part of it,” said Michael Williams, who has served as CEO since 2009. “What we have found from the very beginning is what you do for homeowners in distress is to help them get into a payment that they can afford.”
Currently, when Fannie and its sibling, Freddie Mac, modify loans for borrowers who face hardship, they reduce their monthly payments by dropping the interest rate or waiving payments on a portion of the loan; they don’t forgive any debt. Fannie and Freddie also allow homeowners who are current on their payments to refinance their mortgages, even if they owe more than their homes are worth.
Fannie, which conducted a small pilot project on write-downs, has raised concerns about the time and cost that would be required to put such a principal-forgiveness program in place, company officials said Wednesday. Another concern is that forgiving debts for some borrowers could create a “moral hazard” whereby others stop paying their mortgages.
Advocates of principal write-downs say that despite their higher upfront cost, they would prevent potential foreclosures while speeding a housing recovery.
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