"A top U.S. housing regulator failed to implement a plan to cut loan principal balances for millions of underwater homeowners even though a pilot program showed two years ago it could save taxpayers money, two House Democrats said Tuesday.
Edward DeMarco, acting director of the Federal Housing Finance Agency, which oversees mortgage giant Fannie Mae, "apparently ha(s) been withholding from Congress" documents showing the potential benefits of the program to taxpayers and homeowners, according to Reps. Elijah Cummins of Maryland and John Tierney of Massachusetts. The two Democrats, in a letter to DeMarco that was released to msnbc.com, said they obtained the documents from an independent source.
Cummins and Tierney cited internal documents at government-controlled Fannie Mae describing the pilot program with Citibank, beginning in 2009, that showed that “principal reduction programs have enormous potential to save U.S. taxpayers significant amounts of money.”
Since last fall, DeMarco has resisted pressure to reduce principal balances on underwater mortgages despite calls from more than 100 members of Congress, who have argued that the action could help reduce taxpayer losses on government-owned loans and keep more families in their homes. So far the government has spent more than $160 billion in taxpayer funds to prop up Fannie Mae and sister agency Freddie Mac.
DeMarco's resistance to the idea is based on his "philosophical" opposition to reducing the amount a homeowner owes, according to a former Fannie Mae official quoted in the letter.
The collapse of the housing market in 2006 has erased some $7 trillion of equity from the value of American homes and left roughly 11 million homeowners underwater, meaning they owe their lender more than their home is worth.
Those homeowners, effectively unable to sell their homes, are locked out of the housing market and sidelined from creating the buying demand needed to support any housing recovery. Five years into the housing recession, they’re also more likely to consider walking away from their mortgage, adding to the backlog of foreclosures that could further depress home prices, forcing more households underwater.