A recent letter from Congress to the Acting Director of the Federal Housing Finance Agency (FHFA) indicates the FHFA withheld information regarding their analysis of principal reductions (cramdowns) for negative-equity homeowners. FHFA internal documents provided to Congress by an unidentified independent source show initial analysis of cramdowns in 2009 predicted they would be very effective in stabilizing the real estate market and saving taxpayer money, contrary to more recent FHFA arguments against cramdowns.
The documents revealed that from November 2009 to November 2010, the FHFA identified cramdowns as a highly effective measure to increase stability in the real estate market and mitigate loss for Fannie Mae, Freddie Mac, affiliated lenders, homeowners and taxpayers. Internal reports conducted during this time indicated cramdown programs would cost only $1.7 million to implement, while saving taxpayers $410 million. A former Fannie Mae employee further suggested these beginner programs could have led to larger programs, saving “tens of billions of dollars.”
As a result of these reports, the FHFA developed and implemented multiple cramdown pilot programs, in partnership with lenders including Citibank and Wells Fargo.
However, Citigroup’s program was instituted in April 2010, suspended in July 2010 and terminated in November 2010. Wells Fargo’s two pilots suffered the same fate.
Even after the programs’ suspension, partnering lenders expressed interest in continuing the programs. At the time these programs were terminated a lengthy FHFA report still suggested cramdowns would significantly reduce Fannie Mae’s losses. Considering all documents received in relation to these pilot programs, Congress concluded the programs had been terminated due to “a conscious choice that appears to have been based on ideology rather than Fannie Mae’s own data and analyses.”
The FHFA promptly responded to this letter from Congress, reasserting its commitment to fully disclose all information to Congress. Indeed, the FHFA claimed it had previously submitted to Congress all requested and relevant documents. Further, the FHFA remains committed to the best interests of all involved, without “any ideological tilt on our part, but rather a strict analytical-based approach to gathering and evaluating data.”
first tuesday take
The FHFA’s fallback argument has been that the “moral hazard” in granting cramdowns is too great: if one homeowner receives a cramdown, everybody will demand the same treatment, regardless of their need. Now that the FHFA’s own research and analysis proves giving cramdowns is less risky than withholding them, the agency seems to be clinging to a hazy conviction that cramdowns are “not fair” and will cause a currently unforeseeable economic tragedy in some undetermined, fantastic vision of the future.
Saying FHFA officials are open-minded and unbiased doesn’t make it true. The truth is cramdowns make sense — even FHFA analyses of their effects prove this. first tuesday has been advocating for cramdowns for years since informed, rational thinking supports this tactic as the best option to cure current widespread negative equity.
Should we be surprised that the FHFA unblinkingly killed cramdown programs without sufficient documentation to support its decision? Perhaps we should, yet…we’re not. No-doc loans and blind lending got California into this mess; no-doc decisions on the part of the FHFA are protracting it.
It’s time to build major financial decisions on fact and logic: loans on income, savings and actual value; national policy on data and expert analysis. Personal biases and wishful thinking are obviously not working.
Re: “FHFA Responds to Representatives Cummings and Tierney” from the Federal Housing Finance Agency and “Letter to Edward J. DeMarco from Representatives Elijah Cummings and John F. Tierney” from the Committee on Oversight and Government Reform