Joseph Smith, the White House nominee to be the new GSE regulator, is getting dragged into the fight over whether Fannie Mae and Freddie Mac should participate in a principal reduction program managed by the Federal Housing Administration.
At Smith's confirmation hearing on Thursday, Sen. Richard Shelby, R-Ala., said writedowns of underwater mortgages would result in increased losses to the GSE conservatorships and the taxpayers.
Shelby asked Smith if he would resist White House pressure on Fannie and Freddie to join the FHA short refinancing program which helps borrowers who are current, but under water on their mortgages.
The North Carolina banking commissioner said he knows what it is like to run an independent agency. And as the FHFA director, the nominee said, he would view the principal reduction issue through the "screen" of a conservator to protect taxpayers.
Shelby called the matter an important issue, adding that he wants Smith to "elaborate" on this position in a written response to the committee.
Under the FHA program, the investor or GSE must write down the principal by at least 10% so the loan can be refinanced into a new FHA-insured mortgage with a 97.75% loan-to-value ratio. However, a government sponsored enterprise would recognize a loss on the writedown – but would then transfer all the redefault risk (on the new loan) to FHA.
CoreLogic says that as of mid-year 11 million, or 23% of all residential properties with mortgages, were underwater.