Corker Denounces Home Loan Principal Reduction Plan

Recent comments from the New York Federal Reserve president that government-sponsored enterprises should mimic investors in writing down principal on home loans are receiving harsh push-back from a certain U.S. senator from Tennessee.

Last week in a speech to the New Jersey Bankers Association, William Dudley advocated the use of “accelerated principal reduction” by Fannie Mae and Freddie Mac as a primary type of loan modification to maximize loan value and help stem home price declines.

“We should also develop a program for earned principal reduction for borrowers who are underwater but keep on making their mortgage payments,” Dudley said. “Such a program would strengthen the incentives for mortgage holders who are underwater to continue to stay current on their loans and reduce the likely number of defaults.”

Reacting to Dudley’s comments, Sen. Bob Corker, R-Tenn, said Tuesday that the policy would result in severe long-term damage to the U.S. system of credit. Corker said it would not only result in losses to the taxpayer, but higher interest rates for responsible borrowers for years to come.

“Reducing the principal on home loans for borrowers who put no money down amounts to a massive wealth transfer from places like Tennessee, where most homeowners have borrowed responsibly, to places like California and New York, where exotic mortgages were widely used to finance a speculative housing boom,” Corker said.

“It is absolutely egregious that the Federal Reserve would insert itself in this manner and ask people in Tennessee who played by the rules to bail out reckless borrowers in other parts of the country,” he continued. “A program like this one that reduces principal for a few million underwater borrowers would come at a substantial cost to American taxpayers and responsible borrowers everywhere.”

The New York Fed declined to respond to Corker’s comments.

The GSEs have resisted calls for principal reduction. Fannie Chief Executive Michael Williams told HousingWire in September that the company has no plans to ask mortgage servicers for principal reductions. The GSE announced Tuesday that Williams plans to step down from the his post this year.

In May, Freddie Chief Executive Ed Haldeman, who also recently announced his resignation, said principal write-downs do not make sense for Freddie Mac. Principal reduction may lead borrowers to default at higher rates to try to get their mortgage debt reduced, he said.



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