Fannie, Freddie Mortgage Bill Coming Due, but Who Will Pay?

NEW YORK ( TheStreet) - Fannie Mae ( FNMA)and Freddie Mac ( FMCC) continue to face pressure to reduce principal for homeowners underwater on motgages, but the debate still rages on who will end up paying for it.

The Federal Housing Finance Agency Acting Director Edward DeMarco remains fundamentally opposed to the idea of principal reductions, arguing that any large-scale reduction would only benefit banks.
Edward DeMarco, acting director of the Federal Housing Finance Agency (FHFA)

In an interview with the Financial Times on Sunday, the regulator said policymakers who are pushing the agencies to reduce borrowers's mortgage balances are in effect shielding banks from taking losses on their books.

That's because banks in many cases hold the "second liens" on the same mortgages, additional loans taken by the borrower that are subordinate to the original debt that is owned by Fannie Mae and Freddie Mac. A blanket reduction on the mortgages on Fannie and Freddie's books means taxpayers, who already have forked out more than $180 billion since bailing out the mortgage giants in 2008, will swallow yet another loss, while banks remain protected.

"If you do principal forgiveness, who is it benefiting?" DeMarco argued in the interview. "Doing principal forgiveness is what would protect the big banks."

The FHFA has the express mandate to minimize losses to the taxpayers. In an earlier analysis, the regulator said it would cost Fannie Mae and Freddie Mac - in other words taxpayers- $100 billion to reduce mortgage balances.

Policymakers, however, have been stepping up pressure on the agencies to reduce mortgage balances, arguing that restoring equity on borrowers' homes will help reduce default rates.

Over 11 million borrowers are "underwater", meaning they owe more on their mortgages than what their homes are now actually worth. Underwater borrowers cannot repay their debt even if they manage to sell their homes. Refinancing at lower interest rates also tend to be extremely difficult without home equity, although government programs such as Home Affordable Refinance Program (HARP) now try to target underwater borrowers more actively.

The negative equity in the U.S. housing market is estimated at $700 billion, which presents a big overhang on the default rate.

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