Credit unions could be hurt by a proposal that would allow Fannie Mae and Freddie Mac to write down the principal on millions of underwater mortgages, industry leaders warned this week.
“We are gravely concerned that incorporating principal forgiveness modification as part of borrower-assistance programs would create an incentive for at least some borrowers to strategically default, causing credit unions and their members significant losses that they will not be able to recoup,” said Fred Becker, president of the National Association of Federal Credit Unions. “Credit unions would be more acutely affected by such losses because of their inability to tap into markets to raise capital in order to support revenue-generating programs that would offset the losses.”
The trade group believes that principal forgiveness would ultimately hurt the housing market and cost credit unions and their members greatly.
“Accordingly, we strongly urge you to refrain from adopting such policy,” Becker writes in a new letter to Ed DeMarco, director of the Federal Housing Finance Agency.
In a speech Tuesday, DeMarco said principal reductions would lower Fannie and Freddie losses and help stabilize home prices faster.
Any reduction in principal would help at-risk borrowers but comes at a big cost to Fannie and Freddie, which need taxpayer support. The write down would not occur at the originator, the credit union or the bank, but would hurt real estate values in the affected markets and put more pressure on depositories to also agree to principal write downs, Becker argues.
DeMarco says the agency must weigh the reductions against losses to taxpayers, which have already spent $170 billion to keep the GSEs in the black.
Allowing reductions could lead to a rise in borrowers who strategically default on their loans, he warns. And fewer than 1 million homeowners would be eligible for principal reductions — a fraction of the estimated 11 million Americans who are considered underwater on their loans.
The agency will make a final decision on principal reductions by the end of the month.
