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A Fannie Mae projected a shared appreciation mortgage program would save the company more than $410 million and benefit half of its "customers" if implemented in 2010, according to internal documents obtained by Democrats on the House government oversight committee.
The pilot program was to be conducted with Citigroup ($50.52 -0.01%) and gained approval from the single-family chief risk officer in April 2010. But the program was killed three months later before it got off the ground, according to a letter Reps. Elijah Cummings, D-Md., and John Tierney, D-Mass., sent to Federal Housing Finance Agency Acting Director Edward DeMarco Tuesday. It is unclear if "customers" refers to borrowers with a Fannie-linked mortgage, or bond investors.
Shared appreciation programs vary, but many write down the principal for a delinquent borrower. In exchange, the investor or lender share the appreciation of the home's value with the borrower and take a percentage if the home is sold.
"Citibank officials asked what changed at the '11th hour.' No document has been produced that memorializes this decision or its justification," the letter reads. "Instead, a former Fannie Mae employee has informed us that the program was terminated by officials who were 'philosophically opposed to writing down principal balances.'"
According to the internal documents, the pilot program would have cost Fannie roughly $1.7 million to implement. One Fannie email stated there would be operational problems. But analysis done internally showed the $410 million in benefits could have been realized in six months, the lawmakers said in the letter.
Cummings and Tierney sent a similar letter to DeMarco in February after the Treasury Department expanded the Home Affordable Modification Program to pay investors more for principal reduction. New documents they obtained detail the back-and-forth within Fannie Mae and Citigroup in their latest letter.
The FHFA delayed its ruling for allowing Fannie and Freddie Mac to participate in the HAMP principal reduction effort. In a speech earlier in April, DeMarco said preliminary analysis could save the GSEs roughly $1.7 billion but cost taxpayers a net $2.8 billion.
He also said principal forbearance was used on 26% of GSE modifications in 2011 up from 11% the year before. Forbearance can reduces what the borrower owes on the loan back to the property's value, and sets the leftover amount aside. The borrower does not pay interest on the forbearance amount.
When asked, DeMarco said the forbearance used is very similar to a shared appreciation program and hinted it would be as close to shared appreciation as the GSEs would get.
"Principal forbearance operates in a manner very similar to shared appreciation, except that with forbearance the investor's share of any appreciation from the current home value is paid first and is capped at the time of loan modification to the amount of forborne principal. If house prices rise above the forborne amount the borrower captures all the appreciation," DeMarco said in his speech.
Neither the FHFA nor Fannie had an immediate comment on the letter.
Both congressmen have been pushing for more disclosures on the decision making process from the FHFA and have even threatened DeMarco with his job. They demanded the FHFA provide all documents they've previously requested by May 11.
"We have very serious concerns about your public statements, your previous responses to us, and your failure to provide Congress with complete and accurate information about these important matters," the lawmakers wrote.
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