Congress directed the Federal Housing Finance Agency (FHFA), Fannie Mae and Freddie Mac to “implement a plan that seeks to maximize assistance to homeowners” as part of the Emergency Economic Stabilization Act of 2008. The National Association of Consumer Bankruptcy Attorneys (NACBA), has proposed a plan that, in conjunction with Chapter 13, allows debtors to pay down principal balances on underwater home mortgages. FHFA acting director Edward DeMarco initially praised the plan as a responsible proposal but later withdrew his support while quietly sidelining a similar principal reduction program proposed by Fannie Mae.
In a scathing 12 page letter, Congressman Elijah Cummings, ranking minority member of the Committee on Oversight and Government Reform, and another committee member, Congressman John Tierney, accused director DeMarco of withholding critical information from the committee while lying about the the costs involved and legal authority required for such a program. It has now come to light that a pilot program had been established by Fannie Mae in 2010 but was cancelled for ideological reasons by “senior management.” This startling development was disclosed by a former Fannie Mae employee familiar with the pilot program.
The NACBA proposal requires bankruptcy court approval and would help those homeowners who chose repayment through Chapter 13 bankruptcy as an alternative to Chapter 7. In this setting, a home owner could also remove the lien of a wholly unsecured home equity line of credit (HELOC) or second mortgage. Chapter 13 bankruptcy provides the additional benefits of helping to manage a debtor’s finances and continuing court oversight for a period of up to five years.
To make matters worse, internal studies have shown that Fannie Mae would actually save taxpayers money through use of a principal reduction plan over the preferred alternative of forbearance. The use of forbearance actually increases the likelihood of re-default because it increases the monthly payment by adding the amount of the default to future payments in order to bring the loan current.
Photo courtesy of FHFA Website