WASHINGTON – The federal regulator for Fannie Mae and Freddie Mac on Tuesday said he will not allow the companies to reduce loan balances of troubled borrowers, saying there would be no clear-cut financial benefit and that such a move could cause some homeowners to intentionally default in hopes of getting taxpayer aid.

“We concluded that the potential benefit was too small and uncertain, relative to the known and unknown costs and risks,” said Edward DeMarco, acting director of the Federal Housing Finance Agency. DeMarco raised the question of what the long-term effects of principal forgiveness might be, saying rewriting valid contracts could spook investors and increase mortgage costs in the future.

The decision came after months of internal analysis and heated pressure from the Obama administration, Democratic lawmakers on Capitol Hill and housing advocates, who argued that principal reduction was an essential tool needed in helping to soften the fallout of the housing crisis.

In a letter Tuesday to the heads of the Senate banking committee, DeMarco said principal reductions, “would not make a meaningful improvement in reducing foreclosures in a cost-effective way for taxpayers. Yet there are continued improvements that can and should be made to strengthen the Enterprises’ loss mitigation and borrower assistance efforts, and to improve the operation of the housing finance market. These efforts include further streamlining refinance opportunities, enhancing the short sale process, and reducing lender uncertainty that could inhibit new mortgage lending.”

 

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