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DeMarco Nets Criticism, Praise for Principal Reductions Decision

In a long-running debate, Edward DeMarco, acting director of the ""Federal Housing Finance Agency"":http://www.fhfa.gov/, stated again ""this week"":http://www.dsnews.com/articles/demarco-reiterates-stance-against-principal-forgiveness-program-for-gses-2012-07-31 that he does not support principal reductions and does not endorse their use at Fannie Mae and Freddie Mac.

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After stating his position, he immediately faced criticism and opposition from a broad spectrum of individuals, especially throughout the government. However, DeMarco's decision received a few words of praise as well.

Treasury Secretary Tim Geithner, who formerly opposed principal reductions, sent DeMarco a ""letter"":http://www.treasury.gov/connect/blog/Documents/letter.to.demarco.pdf stating his concern at DeMarco's ""continued opposition to allowing Fannie Mae and Freddie Mac (GSEs) to use targeted principal reduction in their loan modification programs.""

Geithner's letter stated bluntly, ""I do not believe it is the best decision for the country.""

He pointed to the FHFA's own analysis for evidence that principal reductions could save the GSEs as much as $3.6 billion and could save taxpayers up to $1 billion.

This evidence has led economist ""Paul Krugman"":http://krugman.blogs.nytimes.com/ criticize DeMarco's aversion to the strategy, reducing DeMarco's argument to ""because he doesn't feel like it."" Krugman also called into question whether DeMarco is fit for his role.

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In a similarly candid statement, Jared Bernstein, senior fellow at the Center on Budget and Policy Priorities, told ""Reuters,"":http://blogs.reuters.com/felix-salmon/2012/07/31/principal-reductions-demarco-vs-geithner/ ""in unusual times, like the aftermath of the worst housing bubble implosion in decades with 30+% price declines, guess what? Write downs happen.""

In DeMarco's ""letter"":http://www.fhfa.gov/webfiles/24113/PFStatement73112.pdf to congress stating his position on the matter, he expresses concern regarding the ""long-term consequences for mortgage credit availability.""

""Forgiving debt owed pursuant to a lawful, valid contract risks creating a longer-term view by investors that the mortgage contract is less secure than ever before,"" DeMarco stated. This uncertainty would lead to ""higher mortgage rates, a constriction in mortgage credit lending or both,"" he said.

David H. Stevens, president of the Mortgage Bankers Association released a ""statement"":http://www.mbaa.org/NewsandMedia/PressCenter/81480.htm Tuesday expressing the trade group's stance on the issue. ""FHFA has made the determination that the long term national costs of a widespread principal reduction program are unlikely to outweigh what may be a short-term gain for a few select borrowers in certain states,"" he said.

""We agree that principal forbearance can help borrowers realize a payment reduction in a similar way as principal reduction. It is critical to implement solutions that help the American homeowner without incurring the negative long-term impact of making credit less available and more expensive,"" he continued.

Sen. Bachus (R-Alabama) released a ""statement"":http://www.icba.org/files/ICBASites/PDFs/BachusPressRelease.pdf supporting DeMarco's unwavering stance. He went so far as to say DeMarco ""deserves praise for standing up for the best interests of the American people.""

""Everyone knows a job is the best foreclosure mitigation plan,"" Bachus stated.

""Instead of more failed government programs, the President should work with us on bipartisan solutions that help create jobs and heal the housing market,"" he added.

About Author: Krista Franks Brock

Krista Franks Brock is a professional writer and editor who has covered the mortgage banking and default servicing sectors since 2011. Previously, she served as managing editor of DS News and Southern Distinction, a regional lifestyle publication. Her work has appeared in a variety of print and online publications, including Consumers Digest, Dallas Style and Design, DS News and DSNews.com, MReport and theMReport.com. She holds degrees in journalism and art from the University of Georgia.
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