Freddie Mac Fannie Mae

The Federal Housing Finance Agency (FHFA) acting director has criticized the government’s plan to allow mortgage defaulters that contributed to the collapse of the housing industry keep hold of their homes, by reducing the loan principle. According to Forbes, Edward DeMarco is of the opinion that the anticipated benefits from the Obama plan do not outweigh the risks and associated costs.

The FHFA, took the ranks to oversee the  Federal National Mortgage Association (OTC:FNMA) operations of Fannie Mae and Federal Home Loan Mortgage Corp (OTC:FMCC), after the firms were put into conservatorship in 2008; the report notes that FHFA will not let the government-sponsored enterprises participate in the Home Affordable Modification Program Principal Reduction Alternative (HAMP PRA).”

Consequently, the treasury chairman, Tim Geithner responded in another letter expressing his concerns over DeMarco’s decision, saying, “I do not believe it is the best decision for the country, because, as we have discussed many times, the use of targeted principal reduction by the GSEs would provide much needed help to a significant number of troubled homeowners, help repair the nation’s housing market, and result in a net benefit to taxpayers.”

Geithner is of the opinion that the proposed reduction could see the Government Sponsored Enterprises (GSE) save up to $3.6 billion, contrary to the standard modification process.

Federal National Mortgage Association (OTC:FNMA) operations of Fannie Mae and Federal Home Loan Mortgage Corp (OTC:FMCC) are currently on the recovery trend, concurrent with the overall industry recovery. However, there are still fears as to how long this recovery can last.

In February this year, Bank of America Corp (NYSE:BAC) revoked their partnership with Fannie Mae, where, it decided to stop selling mortgage loans to the firm. This estranged the relationship between the lenders and the mortgage sellers, that led to the various actions by the mortgage seller.

Initially, Fannie Mae and Freddie Mac had insisted on the mortgage loan lenders buying back all default mortgages.

However, According to Bloomberg, FHFA came in making an attempt to reduce the loan buybacks, after it emerged that the lenders were tightening the standards in home loans that proved cumbersome, even to the credit worthy home buyers.

Bloomberg also revealed that PNC Financial Services Group Inc. (NYSE:PNC), had plans to increase its reserves to $350 million, while Bank of America said it will buy back $330 million worth of home loans, from Freddie Mac, “because the valuation method used at origination did not meet the investor’s technical requirements,” Dan Frahm, a spokesman for the Charlotte, North Carolina-based bank, said on June 12, notes the report.

Another report indicates that the Federal Housing Agency (FHA), is at advanced stages in reaching legal settlement with various banks that fraudulently claimed that all the mortgage applicants met FHA’s insurance standards. Citigroup Inc. (NYSE:C), Deutsche Bank AG (NYSE:DB), and MetLife Inc (NYSE:MET) are the main culprits in this case, and the Agency claims to have files on the latter.