Corker: Government Should Not Encourage Homeowners To Default

Monday, April 09, 2012

Senator Bob Corker, a member of the Senate Banking, Housing and Urban Affairs Committee, on Monday wrote to Ed DeMarco, acting director of the Federal Housing Finance Agency, urging him to avoid encouraging irresponsible behavior on the part of American homeowners.

“The last thing the federal government should be doing is taking taxpayer money and creating a program that incentivizes homeowners to not pay their mortgages, and I thank you for your record in standing up against efforts that would do just that,” Senator Corker said to Mr. DeMarco in regard to the Treasury Department’s plan to forcibly push principal reduction loan modifications at Fannie Mae and Freddie Mac. “As policy makers, we should reward responsible behavior, not encourage reckless behavior. At no time should any program designed by the government discourage those borrowers working hard to stay current on their mortgages from doing so.” 

On Tuesday, Mr. DeMarco is expected to give a speech to the Brookings Institution outlining the challenges associated with principal reduction loan modifications.

The text of Senator Corker’s letter to Mr. DeMarco is below. 

“I am writing as you come under additional pressure to use increased Treasury incentive payments to perform principal reduction loan modifications.  The last thing the federal government should be doing is taking taxpayer money and creating a program that incentivizes homeowners to not pay their mortgages, and I thank you for your record in standing up against efforts that would do just that. 

 “Recently, however, Treasury has chosen to take money from other funds and use it to forcibly push principal reduction loan modifications at Fannie Mae and Freddie Mac.  While I view this as a poor use of taxpayer resources, and I suspect you do as well, as conservator of these enterprises I am aware that you are statutorily bound to minimize losses at the government-sponsored enterprises.  Unfortunately, you may be forced to view these funds as ‘free money’ even though the funds are coming from hard working Americans.  As a result, if you find yourself forced to embark down a road of moral hazard in order to fulfill your statutory mandate, I would encourage you to do the following.  First, use all reliable empirical data available to quantify the potential costs of incentivizing ‘strategic defaults’ as you examine the economics of principal reduction.  As a country we would be moving in a very dangerous place if we sent a message to homeowners that they would be better off not paying their bills.  Please incorporate the expected losses stemming from more homeowners choosing to walk away from their mortgages in your model, and if this tips the decision against principal reduction, then so be it.  Second, I would urge you to structure this program in such a way as to minimize this incentive.  The vast majority of your book is comprised of borrowers who, despite a challenging economy, have continued to honor their obligations.  As policy makers, we should reward responsible behavior, not encourage reckless behavior.  At no time should any program designed by the government discourage those borrowers working hard to stay current on their mortgages from doing so. 

 “Finally, let me say that while you have been put into a difficult situation by Congress and the Treasury Department, please know that I will be working hard to convince my colleagues in the Senate to finally act responsibly and to give you long-term direction for Fannie and Freddie.  It is growing more and more clear to me that as long as these GSEs exist in their current forms, the administration and Congress will use them to pursue misdirected initiatives like this.  Many in Congress have taken to making the FHFA a convenient scapegoat but have neglected to put forth a plan for the agencies you now oversee.  This is unacceptable, and I hope that it will soon change.” 

 


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