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Democrats Resume Pressure on DeMarco for Principal Reductions

House Democrats continue to push the Federal Housing Finance Agency to offer principal reductions on loans backed by Fannie Mae and Freddie Mac, one of the biggest things that can be done to further an economic recovery. In a letter organized by Rep. Zoe Lofgren, 116 Democrats, a majority of the caucus, urged FHFA Chair Ed DeMarco to give up on his resistance to principal write-downs, saying that his resistance to this point “has prevented the housing market from recovering more quickly.”

Our country faces a national foreclosure crisis. The American people expect government officials, whether elected or part of the civil service, to solve the complex problems that our nation confronts. We therefore urge you to harness your agency’s powers, resources, and financial expertise to prevent more foreclosures and reduce negative equity.

DeMarco has been in an ongoing battle with Democrats on the Hill over principal reduction. His agency personally overruled a principal reduction program through Fannie Mae a couple years ago. The FHFA released a study defending its beliefs on principal reduction, citing costs to taxpayers, that was sloppy and easily refuted by experts. The Federal Reserve Bank of New York and even Ben Bernanke have endorsed the concept of principal reductions.

This is easily the most signatures ever on a letter to DeMarco, and it includes big hitters like Pelosi consigliere George Miller, DCCC Chair Steve Israel and DNC Chair Debbie Wasserman Schultz. In addition, Attorney General Kamala Harris has requested a moratorium on Fannie and Freddie foreclosures in the state of California. So this is part of a broader push.

In a letter to Edward J. DeMarco, the regulator who controls Fannie and Freddie, Ms. Harris asked that foreclosures be suspended until his agency, the Federal Housing Finance Agency, completes a promised review of its policy forbidding debt reduction for delinquent homeowners who owe more than their home is worth.

Her letter, which was sent on Friday and disclosed on Monday, requests “a thorough, transparent analysis of whether principal reduction is in the best interest of struggling homeowners as well as taxpayers.”

FHFA is hyping a recently tweaked refinancing program that will allow more underwater borrowers to lower their interest rates. DeMarco’s said in testimony to the Senate Banking Committee that there is “tremendous borrower interest” in the new HARP. I would imagine there would be even more interest in a principal write-down program.

Members of Congress interested in write-downs do have a job of their own to do. If the Mortgage Forgiveness Debt Relief Act of 2007 is not renewed, borrowers who successfully negotiate a principal reduction would get hit with a large tax bill.

The Mortgage Forgiveness Debt Relief Act of 2007 ensures that homeowners who restructure their mortgages or short-sell their homes don’t have to pay taxes for reducing part of their debt.

Without the law, any cancelled debt typically counts as income. So an underwater homeowner who negotiated a principal reduction on her mortgage would have to pay taxes on that amount of “income.”

The law creates an exemption for up to $2 million of forgiven debt on a taxpayer’s primary residence.

That’s a crucial issue. Borrowers who need a write-down don’t have 35% of the value of that write-down sitting around to pay the federal government. Before Congress hounds DeMarco, they need to take care of the issues they can legislate.

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David Dayen

David Dayen