GOP Senators: Forget Write-Downs, Pay Down Debt Instead

Bloomberg News
Sen. David Vitter (R., La.) criticized an Obama administration plan to encourage mortgage write-downs.

Two U.S. Senate Republicans are urging the Treasury Department to cancel its plans to subsidize debt forgiveness for troubled homeowners, saying the money would be better off reducing the federal debt.

In a letter sent Tuesday to Treasury Secretary Timothy Geithner, Sens. David Vitter (R., La.) and Jim DeMint (R., S.C.) criticized an Obama administration plan to encourage mortgage giants Fannie Mae and Freddie Mac to reduce borrowers’ loan balances. Earlier this year, the administration announced it would use money from the 2008 financial industry rescue to encourage those write-downs.

The letter adds further heat to an intense political debate over whether the two government-controlled companies should reverse their policy and allow loan write-downs.

The two companies, which buy up loans and package them into investments, and their federal regulator have been facing pressure from Democrats and the Obama administration, which want to see write-downs. Republicans, however, are concerned that doing so will encourage borrowers to intentionally default.

In their letter, Messrs. Vitter and DeMint also argue that big banks that hold second mortgages such as home equity loans will benefit from write-downs. The plan “will pay off the mega banks with taxpayer cash in exchange for reducing the principal balance on some mortgages,” the lawmakers wrote. “We write to urge you, on behalf of the taxpayers, to reconsider and, instead, return this money to the Treasury to pay down the national debt.”

Treasury Department officials, however, have disputed the idea that big banks will reap big benefits from a principal write-down program. In a blog post earlier this month, Michael Stegman, a Treasury housing official, said Treasury department rules would force banks to provide more help to homeowners by reducing the value of home equity loans.

“Principal reduction is by no means the solution for all borrowers struggling to pay their bills,” Mr. Stegman wrote. “But it is smart economic policy for some, and where it is we should provide that help.

The Treasury Department has set aside nearly $46 billion for foreclosure-prevention under the 2008 Troubled Asset Relief Program. However, three years after the Obama administration launched its foreclosure-prevention initiatives only about $3.7 billion has been spent.

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