Senator Menendez Criticizes Federal Housing Finance Agency’s Decision Not to Allow Principal Reduction for Homeowners
July 31, 2012
WASHINGTON – Senator Robert Menendez, Chairman of the Housing Subcommittee of the Senate Banking Committee, today criticized FHFA’s decision not to allow principal reduction for struggling homeowners under any circumstances. Senator Menendez has led the call for FHFA to fix its flawed study on principal reduction, spearheading a letter from 30 Senators to Acting Director Edward DeMarco. Click here for a PDF of the letter and here for a press release on the letter.
“This is a terrible decision and one that underscores Mr. DeMarco’s intransigence when it comes to debt forgiveness for homeowners – even as his own analysis shows the benefit to taxpayers,” said Menendez.
Menendez said FHFA’s new principal reduction analysis fails to fix the problems in its original analysis and ignores many obvious solutions to reducing strategic default like shared appreciation where both the lender and homeowner have to give something up.
“Making decisions based on ideology rather than fact could cost Fannie, Freddie, and taxpayers billions of dollars,” Menendez added. “Taxpayers and homeowners deserve fair and complete answers, not shoddy analysis that is driven by ideology and ignores obvious solutions like shared appreciation. FHFA also fails to heed the experiences of many private lenders, who face the same moral hazard concerns as FHFA but are successfully using targeted principal reduction for their borrowers. Five years into the housing crisis, FHFA still hasn’t done any analysis of a shared appreciation model that could easily reduce the strategic defaults FHFA is so concerned about.”
Senator Menendez is the author of S.2093, the Preserving American Homeownership Act, which would create a pilot program (“shared appreciation mortgages”) at the FHFA and FHA to test a program where investors gradually reduce the principal balance of the loan for the homeowners in exchange for receiving a capped and fixed share of the increase in the home’s value when the home is later sold or refinanced. The principal balance of loans is reduced to 95% loan to value ratio over a three-year period provided that the homeowner can continue to make reduced payments.
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