Moral hazard

It’s a common thread in this story, from the White House on down: Not “how do we punish the leaders and institutions who committed systemic mortgage fraud?” but “how can we best punish the victims?”

Fannie Mae (FNMA) pulled the plug on a 2010 plan to forgive borrowers’ mortgage debt because company executives were “philosophically opposed” to the idea, a former company employee told House investigators.

In a letter today to the Federal Housing Finance Agency, House Democrats challenged a January analysis from Acting Director Edward J. DeMarco that claimed principal writedowns would raise costs and increase taxpayer losses at the government-owned company.

“We have now become aware of new information that calls into serious question the accuracy and completeness of your response, as well as your motivation for continuing to oppose principal reduction programs even when they have the potential to save American taxpayers billions of dollars,” said the letter from representatives Elijah Cummings of Maryland and John F. Teirney of Massachusetts, Democrats on the House Committee on Oversight and Government Reform.

FHFA spokeswoman Corinne Russell did not have an immediate comment. The agency oversees Fannie Mae and Freddie Mac, which were taken over by the federal government in 2008 as they neared bankruptcy.
According to the letter, a former Fannie Mae employee told the committee that the mortgage finance company had developed a pilot program for reducing mortgage debt for borrowers who owe more on their house than the property is worth.

The purpose of the plan was to develop “a responsible way to reduce principal balances for underwater mortgage borrowers without creating undue incremental moral hazard,” the employee told the committee.
The pilot had preliminary approvals from officials at Fannie Mae, FHFA, and the Office of the Comptroller of the Currency, a bank regulator, according to the former employee.

In mid-2010, two weeks before its launch, senior Fannie Mae executives cancelled the program because they were “philosophically opposed to writing down principal balances,” according to the former worker, who was quoted in the letter without being identified.

One thought on “Moral hazard

  1. Let’s see…..should we believe DeMarco or should we believe Cummings and Teirney? Either Corinne Russell, doesn’t know who to believe, has no opinion or she’s not willing to stick her neck out. The bottom line is this. ALL of this money belongs to “we the people.” And “we the people’ will pay no matter what happens. The 1% doesn’t keep its money by giving it to the 99% or by losing it in bad deals. Bush’s bailoutto the banks proved that fact to be true. Anybody in charge of anything in this country is a thief. Nancy Brinker at Koman skims off $410,000 a year in salary.

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