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Coalition of AGs Urge GSEs to Implement Principal Forgiveness for Homeowners

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Arguing that the failure to implement principal loan forgiveness in its loan modification programs harms struggling homeowners and investors, Massachusetts Attorney General Martha Coakley led a coalition of states in urging Fannie Mae and Freddie Mac to reverse its position. AG Coakley made her case in a letter sent to Edward J. DeMarco, Acting Director of the Federal Housing Finance Agency (FHFA). Coakley was joined by 10 other state attorneys general, including California, Delaware, Illinois, Iowa, Maryland, Minnesota, New Mexico, New York, Oregon and Vermont.

“The financial stability of Fannie Mae and Freddie Mac will not be harmed if they engage in principal forgiveness and according to new data could save close to $1.7 billion,” AG Coakley said. “We will soon see the results of the country’s largest banks implementing principal loan reduction as required under the recent Multistate Servicing Settlement. It is now time for the FHFA to accept the fact that principal forgiveness programs help borrowers, help communities and can improve the creditors’ bottom line.”

In the letter, the attorneys general argue that the increase of incentive payments to investors for allowing forgiveness under the Home Affordable Modification Program (HAMP) should also reduce concerns regarding the potential impact on the financial stability of Fannie Mae and Freddie Mac as either owner or guarantor of these loans. Additionally, the letter states that reluctance to engage in principal forgiveness based on the inability of internal computer systems to handle new programs is not an excuse as the nations’ largest banks overcame similar concerns after the Multistate Servicing Settlement reached last month.

As part of their argument, the Attorneys General write, “More than five million people have lost their homes due to foreclosure in the past five years, with millions more on the brink of foreclosure. Effectively resolving this foreclosure crisis is a key to restoring a healthy economy for our entire country. Because Fannie Mae and Freddie Mac own a majority of the nation’s home loans, they must be a leader in the arena of loan modification best practices, and not an obstruction.”

The FHFA has formally acknowledged that principal forgiveness can serve the long-term interests of taxpayers when compared to foreclosure by combining the goal of asset preservation and foreclosure prevention. According to Director DeMarco’s recent remarks to the Brookings Institution, an initial analysis of new incentives from the Treasury Department by the FHFA shows that Fannie Mae and Freddie Mac could save $1.7 billion if they applied principal forgiveness in its modification programs.

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