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Treasury Tries to Close Gap on Principal Reductions with FHFA

MAR 22, 2012 10:04am ET

Administration officials are trying to get the Federal Housing Finance Agency to reconsider its resistance to principal reductions on loans purchased by Fannie Mae and Freddie Mac, Treasury Secretary Tim Geithner told lawmakers Wednesday.

Geithner, who appeared at a hearing with Federal Reserve chairman Ben Bernanke before the House Oversight Committee, said Treasury is working with FHFA director Edward DeMarco to determine whether principal writedowns for certain underwater borrowers could be done in a way that is palatable to the agency.

“There are certain cases where we think there’s a pretty strong economic case for a principal reduction as part of a strategy to limit the future losses” of the GSEs, Geithner said.

He added: “What we’re trying to do is encourage Mr. DeMarco, who is fully independent, to take another look at the evidence, because we think there’s a place to do more in a way that is consistent with the mandate that Congress gave him.”

While DeMarco has said that principal reductions are one of the several options available to the GSEs, FHFA has found that other tools are more effective -- such as lower interest rates and longer loan terms.

Treasury is holding talks with FHFA to narrow the difference between the two agencies regarding principal writedowns.  “We’re working through those numbers with him and I expect to hear more from him in the next couple of weeks,” the Treasury secretary said.