Trade associations are up in arms over Federal Housing Finance Agency Director Edward DeMarco'scomments Tuesday at the Brookings Institute that the FHFA mayconsider principal forgiveness for certain underwater borrowerswhose loans are owned or guaranteed by Fannie Mae or FreddieMac.

In a letter to FHFA, NAFCU President/CEO Fred Becker agreed withDeMarco when he said a key risk in principal forgiveness is theincentive for borrowers to cease paying in search of a principalforgiveness modification.

Updates:

• Becker: Principal Forgiveness Could 'Filter Through to CUs'
• FHFA Principal Forgiveness Wouldn't Directly Affect Credit Unions:CUNA Execs

“Strategicallydefaulting on loans is a problem in the housing market andcontinues to cause credit unions great difficulties,” Becker saidin the letter. “We are gravely concerned that incorporatingprincipal forgiveness modification as part of borrower-assistanceprograms would create an incentive for at least some borrowers tostrategically default, causing credit unions and their memberssignificant losses that they will not be able to recoup.”

Becker added a pitch for proposed legislation that aims to givecredit unions access to secondary capital, saying “credit unionswould be more acutely affected by such losses because of theirinability to tap into markets to raise capital in order to supportrevenue-generating programs that would offset the losses.”

CUNA General Counsel Eric Richard cautioned Credit UnionTimes that very few details about the plan have been released,and it has not been adopted by FHFA at this point.

“Any plan to reduce principal must be undertaken with great careto avoid giving an incentive to more homeowners to stop payingtheir mortgages,” he said.

The plan is apparently based on further subsidies to Fannie andFreddie to cover any principal reductions, he added, and otherlenders, such as credit unions, who will not be getting suchsubsidies should not be expected to follow suit.

American Bankers Association President/CEO Frank Keatingsaid in a statement that there are more cost-effective andefficient options for borrowers and American taxpayers thanprincipal reduction.

“In most instances, principal reductions through Fannie Mae andFreddie Mac are not a feasible solution because they increase –rather than limit – taxpayers' liability, raise the cost of creditand create improper incentives for borrowers,” Keating said.

Principal reduction would create an incentive for “a huge groupof borrowers” to stop making payments on their mortgages in hopesof principal forgiveness, he said. And, such a program would resultin fewer investors willing to lend for housing finance, increasedborrowing costs and tighter credit availability.