Fannie Mae (USOTC:FNMA)
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WASHINGTON (Dow Jones) -- Mortgage giant Fannie Mae (FNMA) explored pilot loan-writedown programs in 2009 and 2010 with Citigroup Inc. (C) and Wells Fargo & Co. (WFC) but ended them due to "complex operational issues," a housing regulator told U.S. lawmakers.
The general counsel of the Federal Housing Finance Agency, Alfred Pollard, sent a letter last month to House Democrats explaining Fannie Mae's decision not to move ahead with trial loan writedown programs that the government-controlled mortgage finance company explored in 2009 and 2010. The letter was obtained Tuesday by Dow Jones Newswires.
The housing regulator has been under pressure from Congressional Democrats and the Obama administration to reconsider its opposition to loan-writedown programs. In the letter to Rep. Elijah Cummings (D., Md.) and Rep. John Tierney (D., Mass.), members of the House Oversight Committee, Pollard said that the pilot writedown programs, "to the extent they were begun, ended due to complex operational issues involving system changes, accounting considerations and the interest level of Fannie Mae's partners."
Wells Fargo's program got further along, with several hundred borrowers receiving writedowns. But it had data-entry problems, as Fannie Mae's software system doesn't allow for principal writedowns, Pollard's letter said. In addition, borrowers who received writedowns performed no better than those who didn't.
Fannie Mae made the decision on its own not to implement the Citi pilot, citing concerns over costs and operational challenges, Pollard's letter said. Fannie then proposed different pilot that Citi wasn't able to accommodate. Representatives of Citi, Fannie, Wells Fargo and FHFA didn't comment.
Cummings, the top Democrat on the House's oversight panel, has been persistently critical of Edward DeMarco, the acting head of FHFA, pressing him to enact principal reductions and calling for DeMarco's ouster.
On Tuesday, Cummings and Tierney wrote to DeMarco saying that documents obtained by his committee "show that Fannie Mae officials strongly supported the concept of principal reduction and fully evaluated its risks and benefits as they obtained the necessary internal approvals to finalize the program."
For example, they excerpted a November 2009 presentation to a Fannie Mae risk panel about the Citi writedown pilot. It said the "business case for shared equity is strong" and that "underwater borrowers will perform better on a modification that reestablishes equity." And they also found out that more than 50 executives at both companies met in April 2010 to "finalize timelines for the program, identify outstanding issues, and review the program's integrated test plan." The program was suspended that July, the lawmakers said.
"There were number crunchers inside Fannie who were skeptical that principal reduction would pay for itself," said Peter Swire, a former housing adviser to President Barack Obama. More generally, DeMarco was consistently worried about "operational risk," he said. "He didn't want [Fannie and Freddie] taking on too many new projects. That was a real concern."
-By Alan Zibel, Dow Jones Newswires; 202-862-9263; email@example.com