... AND WHY THEIR REFUSAL MAY BE IN GOOD FAITH.
Sometimes it takes a little learning.
The Federal Housing Finance Agency is the current, and hand-picked, regulator for both Fannie Mae and Freddie Mac. The acting director of FHFA says that he takes his duties seriously. His duties are above all to safeguard the risks imposed on the Taxpayer and the money the Taxpayer will have to pay.
Fannie Mae and Freddie Mac were both put into conservatorship as a result of the Mortgage Fiasco, of course. Neither had the money to pay the bills, i.e., the Mortgages they assumed, once the bills came due.
There have been calls for Fannie and Freddie to write down the principal amount of the first Mortgages which they assumed. The publicly stated theory behind such calls is that Homeowners-Mortgagors will find it easier to pay reduced first Mortgages.
This ignores a fact that the FHFA acting director cannot ignore, however. Writing down the principal on first Mortgages held by Fannie and Freddie without a corresponding write-down of the principal on second Mortgages would increase the likelihood that the second Mortgages would remain completely in effect and would be paid, or the Homeowners would suffer the consequences of Foreclosure once the first Mortgages, now held by Fannie and Freddie, no longer exist once a reduced write-down amount is paid.
There is a victim, if you will, if Fannie or Freddie write down the principal amount due on first Mortgages even as the Homeowners would be given apparent relief on the face of it: Federal Taxpayers are the people due the principal amount which is being written down. If the principal is in fact written down, the Taxpayers recover less whenever any Mortgage now held by Fannie or Freddie is reduced.
Further, the second Mortgagors are investment Banks. They already got their bailout, as we all know.
Reducing the amount owed on first Mortgages held by Fannie Mae and Freddie Mac, without a corresponding write-down of the principal on second Mortgages held by the Banks, would mean nothing less than a second bailout of the Banks.
Much of this is laid out in an easy-to-understand article by Gretchen Morgenson, "Fair Game / A Bailout by Another Name" p.1 col. 6 (New York Times Nat'l ed., "SundayBusiness" Section, Sunday, March 25, 2012). As Ms. Morgenson wrote at the conclusion of her article:
So the next time you hear someone advocating vast principal reductions on Fannie and Freddie loans, remind them that it would be another stealth bank bailout, courtesy of taxpayers. Banks' unwillingness to share the pain has been a central feature of this crisis. It's time to put an end to this dysfunctional dynamic.
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