FHFA rejects White House plan for Fannie and Freddie

Occupy protesters carry a banner as they march to a foreclosed home that they are going to re-occupy on December 6, 2011 in Oakland, Calif.

Jeremy Hobson: A federal housing regulator is rejecting a White House plan to help borrowers who are underwater on their mortgages. That means they owe more than their homes are worth and there are about 11 million people in that category. The Federal Housing Finance Agency said the potential benefits of cutting mortgage balances for those people don't outweigh the costs.

Marketplace's Amy Scott joins us live with more on this story. Good morning.

Amy Scott: Good morning.

Hobson: Well Amy, remind us who this regulator is, and what this decision means?

Scott: The FHFA regulates Fannie Mae and Freddie Mac, the two government-run mortgage finance companies. And its chief, Edward DeMarco, has been under a lot of pressure from the Obama Administration, which wants Fannie and Freddie to reduce the principle on a lot of those underwater mortgages, rather than just cutting monthly payments. But yesterday, DeMarco said the potential benefits are just too small to justify the risks.

Hobson: Well, what are the risks that he's worried about?

Scott: Jeremy, remember that term "moral hazard" that came up a lot in the financial crisis?

Stan Humphries is chief economist at Zillow, and he says private lenders can and are doing this on a case-by-case basis. But Fannie and Freddie are government-sponsored entities, and they would have to be a lot more uniform about it.

Stan Humphries: You then have to have a set of guidelines, that if you qualify for this program, you're going to get some principle reduction, which is then going to possibly create more incentives for people to become delinquent on their mortgages.

Now of course, the Obama administration isn't happy with this decision. Treasury Secretary Timothy Geithner sent DeMarco a strongly-worded letter criticizing the decision.

But you know, he isn't alone. Humpries says that Zillow did a poll of economists; most of them agreed that large-scale principle reduction wasn't a good idea.

Hobson: Marketplace's Amy Scott, thanks a lot.

Scott: You're welcome.

About the author

Amy Scott is Marketplace’s education correspondent covering the K-12 and higher education beats, as well as general business and economic stories.

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