By Ian McKendry

WASHINGTON (MNI) – Just two days after the Federal Housing Finance
Agency released a report saying principal reductions for Fannie Mae and
Freddie Mac mortgages would cost taxpayers an additional $100 billion
more than what they are already on the hook for, Federal Reserve Chair
Ben Bernanke said Wednesday principal reductions “very likely could be
helpful.”

“I have spoken about this in the past and it certainly has some
advantages,” Bernanke said at a press conference. “A lot depends on how
it’s structured and what the alternatives are that you’re considering.”

The Fed put out a white paper earlier in the month that broached
the idea of principal reductions, along with a number of other possible
housing policies, but said the intent of the paper was to explore the
pros and cons of certain ideas rather than advocate any one suggestion.

“I think it’s important to say that our intent in that white paper
was to provide the benefit of our analysis to the public, and to those
who will be making policy,” Bernanke said, adding “we did not take
specific stands on individual issues.”

Furthermore, there are “a variety of views about principal
forgiveness in the Federal Reserve system and there’s no official
position.”

The same could be said for Congress with many members opposing
expanding the government’s role in housing finance while others would
like to see more support for their constituents, many of whom are
struggling to make mortgage payments on homes that will probably never
reach the value of their current mortgage.

In response to a subpoena request for documents from the FHFA,
acting Director Edward DeMarco Monday submitted a once internal analysis
to House Members that found principal forbearance, which reduces the
monthly mortgage payment to a more affordable level, is more cost
effective for taxpayers than principal forgiveness.

DeMarco said the GSEs have nearly three million first lien
mortgages outstanding that are underwater and principal forgiveness
which would lower the principal balance of the mortgage to a level equal
to the value of the home would cost $100 billion.

DeMarco added that 80% of the three million homes are underwater.

“Given that any money spent on this endeavor would ultimately come
from taxpayers and given that our analysis does not indicate a
preservation of assets for Fannie Mae and Freddie Mac substantial enough
to offset costs, an expenditure of this nature at this time would, in my
judgment, require congressional action,” DeMarco said in a letter that
accompanied the analysis.

Bernanke also noted the “potential drawbacks” of a principal
forgiveness program, namely the roughly $700 billion in negative equity
outstanding in the US.

The Fed will continue to evaluate the housing sector as it has
“considerable interest in the area” because “the problems in the housing
finance are part of the reason why monetary policy has not been more
powerful,” Bernanke said.

** Market News International Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$,M$$AG$]