Congressmen Accuse Fannie and Freddie Boss of Ideological Bias

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Andrew Harrer / Bloomberg via Getty Images

Edward "Ed" DeMarco, acting director of the Federal Housing Finance Agency.

Updated at 1:30 p.m.

There’s a sizable portion of the American public that’s against bailing out underwater American homeowners under any circumstances. That sentiment was most eloquently summed up by CNBC’s Rick Santelli in 2009. His fiery speech on the floor of the Chicago Board of Trade is credited with spurring the Tea Party movement and helping coalesce forces against government bailouts of all kinds.

But others argue “what’s good for the goose is good for the gander.” Large banks got bailed out even though they made bad loans, yet homeowners on the other end of those deals have been left holding the bag. These folks argue that by slashing the amount borrowers owe on their loans, we could not only help struggling homeowners, but also stimulate the lagging recovery. Reducing principal, they argue, would stem foreclosures, stabilize home prices, and stimulate consumer spending.

Unfortunately for those who favor this approach, the man in charge of the nation’s largest portfolio of mortgages, Fannie Mae and Freddie Mac conservator Ed DeMarco, has so far refused to go down that road, arguing that principal reduction would only saddle taxpayers with additional costs.

(MORE: Building a Better Bailout: Can Fannie and Freddie Help American Homeowners?)

But new evidence has emerged that DeMarco may be blocking principal reductions for philosophical rather than fiscal reasons. In a letter written last week by Democratic Representatives Elijah Cummings and John Tierney, the lawmakers state that they have obtained documents from “an independent source” which suggest that the Acting Director squashed a pilot program that would have both saved taxpayer money and helped out struggling homeowners. According to the Congressmen:

“We have now obtained a wide range of internal documents demonstrating that Fannie Mae officials conducted detailed, substantive analyses and concluded years ago that principal reduction programs have enormous potential to save U.S. taxpayers significant amounts of money by reducing overall losses from foreclosures following default.”

The letter goes on to describe a pilot program, created in partnership with Citibank, that would have reduced some homeowner mortgages. According to the documents obtained by the Congressmen, the analysis done by Fannie Mae showed that this would have saved taxpayers money because it would have kept more homeowners out of foreclosure. (For mortgage lenders foreclosure is often a much more expensive process than simply forgiving some of the principal that a borrower owes.) However, this program was “suddenly suspended” in July of 2010. An unnamed Fannie employee informed the Congressmen that the “the program was terminated by officials who were ‘philosophically  opposed to writing down principal balances.’”

(MORE: Is Fannie and Freddie Honcho Ed DeMarco “America’s Most Dangerous Man?”)

DeMarco fired back at the Congressmen later that same day in a letter that stated, “I wish to convey my disappointment with this letter, the failure to contact FHFA to address your concerns, and the release of selective elements of the proprietary and confidential materials you received.” DeMarco also denied that there was any ideological basis for his rejection of principal reduction. He said that the FHFA was continuing its analysis of principal reduction programs in light of changes made to Treasury programs designed to encourage lenders to help homeowners.

If these allegations are true, they are potentially damning for DeMarco. The FHFA has been without a Senate-approved director since he took over in an acting capacity in 2009, and his critics have been pressuring the Obama administration to replace him with someone more amenable to principal reduction. DeMarco has defended his refusal to implement principal reduction programs on the grounds that he is merely fulfilling his Congressional mandate, which charges him with protecting taxpayer funds. While many agree that widespread principal write-downs would go a long way towards reenergizing the housing market, experts are divided as to whether the measure would be ultimately cost effective. However, if these allegations are true, critics would be able to charge that DeMarco is deliberately flouting his mandate, which would give the Obama administration reason to install someone more sympathetic to using Fannie and Freddie as tools for stimulating the housing market.

Cummings and Tierney haven’t made the documents to which their letter refers public, so at this point it’s a game of he-said-she-said. But this all may come to a head soon. Both the House Committee on Financial Services and Cummings and Tierney have requested that DeMarco present them with his formal analysis of a principal reduction program later this month. So far the only data that DeMarco has made public has been short on details. The House hopes to force the Acting Director to put his cards on the table.