This week’s long overdue False Claims filing by the Federal Government against Bank of America over Fannie Mae and Freddie Mac Mortgages originated by Countrywide gives the most compelling reason yet why the Federal Housing Finance Agency (FHFA) should reverse its ridiculous position prohibiting the two largest owners of mortgage notes in the nation from agreeing to loan modifications that reduce principal.
Edward DeMarco, the Neanderthal director of the FHFA has consistently resisted pressure from the Obama Administration and Congress and defied common sense by prohibiting the two mortgage giants he regulates from resolving defaulted loans by agreeing to principal reductions.
The centerpiece argument to this week’s suit against Bank of America, is that Countrywide alone originated over one billion dollars worth of loans that should never have been written under the guidelines of the mortgage giants, essentially loans that were destined to fail. There is lots of evidence that other originators sold Fannie Mae and Freddie Mac tens of billions of dollars of additional loans that should have never been written under their guidelines.
The lawsuit filed in Federal District Court in New York, provides a detailed and compelling story of a top to bottom scheme at Countrywide to originate and sell loans to the two agencies without any true effort to determine whether or not they met Freddie and Fannie’s underwriting standards.
What this means for homeowners is that the federal government has now taken the legal position that millions of borrowers were intentionally placed in loans that were designed for failure.
What this means for the Federal Government, and we taxpayers, who now own both of the mortgage giants is that the only rational solution for minimizing our losses is to restructure these loans on an individual basis, using all available options to add value to these toxic loans. That must include allowing Fannie and Freddie to reduce principal when doing so allows a homeowner to stay in their home, and the present value of the loan is increased by the principal reduction modification.
FHFA can no longer ignore the objective fact that reducing principal on distressed loans often increases the present value of those loans. It is good business for Fannie and Freddie, good policy for the country and would be a lifeline to homeowners who were defrauded by Countrywide and the other mortgage boom players into signing on mortgages that were destined to fail.
Marc Dann can be reached at firstname.lastname@example.org