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April 11, 2012 – Principal forgiveness on loans guaranteed by Fannie Mae and Freddie Mac would ultimately hurt the housing market and "cost credit unions and their members greatly," NAFCU President and CEO Fred Becker said in a letter Tuesday to Ed DeMarco, acting director of the Federal Housing Finance Agency.

Becker wrote in response to remarks delivered by DeMarco before a Brookings Institution gathering Tuesday. In his address, DeMarco said new analysis shows Fannie Mae and Freddie Mac could save up to $1.7 billion by allowing some principal reduction for delinquent borrowers. He said the FHFA was looking at whether the enterprises will offer principal forgiveness as part of the Home Affordable Mortgage Program incentives provided by Treasury.

While noting the upside of principal forgiveness, DeMarco also pointed to a downside – that it could remove the incentive for borrowers who are currentto stop paying on their loans in favor of seeking such a modification.

Becker said NAFCU agrees that borrowers who are underwater but current on their payments do pose greater contingent risk to housing markets and to taxpayers. He added that strategic defaults are still a problem and are still causing credit unions great difficulty.

"We are gravely concerned that incorporating principal forgiveness modification as part of borrower assistance programs would create an incentive for at least some borrowers to strategically default, causing credit unions and their members significant losses that they will not be able to recoup," the NAFCU president wrote.

Becker added that credit unions would be more acutely affected than other institutions since they cannot tap into markets to raise capital to support revenue-generating programs that might offset the losses. "We strongly urge you to refrain from adopting such a policy," he urged.