Addressing members of the Greater Nashville Association of Realtors today, U.S. Senator Bob Corker, R-Tenn., discussed his proposal for long-term housing reform and sharply criticized recent comments by New York Federal Reserve President William Dudley who has advocated using Fannie Mae and Freddie Mac to write down the principal on home loans where the borrower owes more than the home is worth.
“Reducing the principal on home loans for borrowers who put no money down amounts to a massive wealth transfer from places like Tennessee, where most homeowners have borrowed responsibly, to places like California and New York, where exotic mortgages were widely used to finance a speculative housing boom,” Corker said. “It is absolutely egregious that the Federal Reserve would insert itself in this manner and ask people in Tennessee who played by the rules to bail out reckless borrowers in other parts of the country. A program like this one that reduces principal for a few million underwater borrowers would come at a substantial cost to American taxpayers and responsible borrowers everywhere.”
In a recent speech to the New Jersey Bankers Association, William Dudley advocated the use of "accelerated principal reduction" by Fannie Mae and Freddie Mac as a primary type of loan modification to help stem home price declines. However, the long-term damage to our system of credit from such a policy will be severe and will not only result in losses to the taxpayer but likely higher interest rates for responsible borrowers for years to come.
In November, Corker introduced the Residential Mortgage Market Privatization and Standardization Act in an effort to start a real conversation in Washington about the need to responsibly unwind government-sponsored enterprises Fannie Mae and Freddie Mac and gradually end dependence on the government for housing finance.