Coakley sent a three-page letter to FHFA Director Mel Watt trying to persuade him that principal reductions could be crafted in such a way to prevent abuses, including what she called “the abstract fear of waves of strategic defaulters.”
Coakley and New York Attorney General Eric Schneidermann were among those who lobbied last year to oust former FHFA director Ed DeMarco, who steadfastly refused to allow the government-sponsored enterprises to offer principal reductions to borrowers.
In 2012, DeMarco concluded that while principal reductions could save taxpayers between $100 million to $500 million, redefaults by just a few thousand borrowers could wipe out any savings. He also concluded that an expanded principal reduction program would encourage more strategic defaults.
At the time, he noted that the 74,000 to 248,000 borrowers who might be eligible for principal reduction were already eligible to receive a standard loan modification.
Principal reductions also go against the FHFA’s mandate to protect taxpayers, particularly since many distressed borrowers are underwater, owing more on their mortgage than their home is worth.
Coakley said one way to reduce strategic defaults would be to adopt clear modification underwriting standards, require a showing of hardship by the borrower and allow lenders to share in the home price appreciation.
In the letter, Coakley even threated to take legal action because the FHFA has refused to take part in buyback programs that allow nonprofits to purchase distressed homes at current market value and immediately resell them to the former homeowner.
“Our office also is considering all available legal avenues—including litigation—to ensure compliance with Massachusetts law, should FHFA fail to promptly amend its policies to allow the GSEs to participate in credible buyback programs,” Coakley wrote.