If the Federal Housing Finance Agency launches a mortgageprincipal forgiveness program, only loans that have been sold toFannie Mae and Freddie Mac would qualify, so it wouldn't have adirect effect on credit union balance sheets, CUNA Executive VicePresident and General Counsel Eric Richard told Credit UnionTimes.

In fact, such a program might even benefit institutions likecredit unions that hold second liens, because principal forgiveness“would force the losses down the throats of the holder of thefirst,” Richard said.

However, principal forgiveness could create “me-too” pressure oncredit unions, the CUNA attorney said, because consumers don'tunderstand the secondary mortgage market.

“Your members could come to you saying 'my neighbor got this,and I want the same from you',” he said.

A principal forgiveness modification program could reduce lossesto Fannie and Freddie, but it would be at the expense of otherfederal agencies who would subsidize the loss, which wouldultimately be paid by taxpayers, said CUNA Chief Economist BillHampel.

Hampel played down FHFA Director Edward DeMarco's comments aboutprincipal forgiveness he made Tuesday at the Brookings Institute, saying he thinksmost have misinterpreted them.

DeMarco has been opposed to principal write-downs for long time,and has taken a lot of heat for that position from Democrats on theHill and the Obama Administration, Hampel said.

“So, he looked at it again, and said 'we haven't reached aconclusion, but there are a set of circumstances where adoptingthis program could reduce losses to Fannie and Freddie',” the CUNAeconomist said. “He also said it could increase the incentive forthose who have been paying on the first … to become delinquentenough to quality for principal reduction.”

Some who have heard DeMarco oppose write-downs for months nowsay the door is open for them, Hampel said, but others say he willstick with his opposition.

“So, jumping to the conclusion from his speech from yesterdaythat they are about to adopt a policy in favor of principalwrite-downs is a big stretch,” Hampel said.