Corker opposes write-down of mortgage principal

By Vicki Needham - 01/10/12 12:00 PM ET

A Tennessee Republican is concerned that taxpayers will bear the burden of costs if mortgage giants Fannie Mae and Freddie Mac write down the principal on mortgages in which the borrower owes more than the home is worth.

Sen. Bob Corker (R) sharply criticized recent comments made by New York Federal Reserve President William Dudley urging Fannie and Freddie to do principal reductions for homeowners who are underwater on their mortgages.

“Reducing the principal on home loans for borrowers who put no money down amounts to a massive wealth transfer from places like Tennessee, where most homeowners have borrowed responsibly, to places like California and New York, where exotic mortgages were widely used to finance a speculative housing boom,” Corker told the Greater Nashville Association of Realtors on Tuesday. 

“It is absolutely egregious that the Federal Reserve would insert itself in this manner and ask people in Tennessee who played by the rules to bail out reckless borrowers in other parts of the country," he said.

In a recent speech to the New Jersey Bankers Association,Dudley advocated the use of "accelerated principal reduction" by Fannie and Freddie as a primary type of loan modification to help slow housing-price declines.  

However, Corker said the policy will create long-term damage and will not only result in taxpayer losses but possibly higher interest rates. 

In November, Corker introduced legislation on how to unwind government-controlled Fannie and Freddie and gradually end dependence on the government for housing finance. 

The Treasury Department and other lawmakers have floated ideas on reducing Fannie and Freddie's involvement in the mortgage industry but no agreement has been reached on the process while the housing market regains its footing. 

On Jan. 4, the Federal Reserve released a 26-page white paper with its recommendations for policy changes to stabilize the housing market and boost the broader economy. 

Although the paper did not outline any specifics, it suggested in a round-about way that the government regulator — the Federal Housing Finance Agency — reduce mortgage balances, a step backed by Democrats but generally opposed by Edward DeMarco, the housing overseer. 

The paper said in regard to principal write-downs that "some actions that cause greater losses to be sustained by the GSEs in the near term might be in the interest of taxpayers to pursue if those actions result in a quicker and more vigorous economic recovery."

DeMarco has maintained that cutting mortgage balances would add on to the already high taxpayer cost of rescuing Fannie and Freddie.

During a hearing in November, he said his agency has looked at the issue and "concluded that the use of principal reduction within the context of a loan modification is not going to be the least-cost approach for the taxpayer."

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