Why is Ed DeMarco Blocking a Win-Win Housing Program?

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Andrew Harrer / Bloomberg via Getty Images

Edward "Ed" DeMarco, acting director of the Federal Housing Finance Agency.

Widespread principal reduction for underwater homes has long been the Holy Grail for many observers of the housing market, as well as for those who believe the weak housing market is one of the heaviest burdens weighing on the broader economy. Supporters of writing down mortgages to reflect their current values say that it’s a win-win solution: Underwater homeowners would obviously benefit from having their liability reduced, but mortgage lenders would also, in theory, benefit because principal reduction is usually much less expensive than the foreclosure process — and severely underwater homeowners are much more likely to default on their loans than are those who have some equity.

Even if you’re not an underwater homeowner, this pertains to you because American taxpayers — through the government’s conservatorship of Fannie Mae and Freddie Mac — own or guarantee roughly 60% of the outstanding mortgages in America. So if proponents of principal reduction are correct, implementing such a plan through Fannie and Freddie would save taxpayers money, help out struggling homeowners, and stimulate the broader economy.

(MORE: Building a Better Bailout: Can Fannie and Freddie Help American Homeowners?)

So why haven’t we implemented this? The man in charge of Fannie and Freddie, FHFA Acting Director Ed DeMarco, doesn’t see eye to eye with the principal reduction crowd. He has argued that existing programs put forward by the Treasury and FHFA are just as effective as principal reduction, and that a program of principal reduction would attract dishonest “strategic modifiers” who would abuse a program they don’t actually need. If enough people did this, DeMarco has argued, the program would no longer be cost effective for the taxpayer, and therefore counter to his Congressional mandate to limit taxpayer losses.

When DeMarco last spoke publicly about his efforts to help struggling homeowners, he said that his organization was still studying the issue, in light of new incentives offered by the Treasury Department to pursue principal reduction. Well, the study is now complete and information contained in it was leaked to The Wall Street Journal  Monday by “people briefed on the findings.” According to the article, the study contradicts the claim that the FHFA made in April that principal reduction wouldn’t be cost effective:

“In April, the agency said that loan forgiveness would save about $1.7 billion for the companies, relative to other types of relief. At the time, the agency said that because the Treasury was paying to subsidize those write-downs, the relief would still cost taxpayers $2.1 billion, offsetting any savings to the companies.

But the latest analysis done by the agency found that such write-downs would generate $3.6 billion in savings for the companies, under certain assumptions, according to people familiar with the analysis. Even after subtracting the cost of the Treasury subsidies, the program would save $1 billion, these people said.”

(MORE: Should Eminent Domain Be Used to Save Underwater Homes?)

But not so fast. In a letter sent yesterday to the Senate Banking Committee, DeMarco announced that he would not allow Fannie and Freddie to participate in a principal reduction program. Wrote DeMarco: “The potential benefit was too small and uncertain relative to known and unknown costs and risks.”

So were the Journal‘s sources lying? Perhaps not, but according to DeMarco’s letter they left out several factors that would increase costs to taxpayers including implementation costs, the diversion of labor from existing loss-mitigation programs, and the aforementioned “strategic modifiers,” who DeMarco believes would dishonestly come seeking taxpayer aid.

The decision stirred up the fresh ire of the Treasury Department, which has been increasingly vocal in its support for broad-based principal reduction. In a letter to DeMarco, also fired off yesterday, Treasury Secretary Tim Geithner criticized the decision, saying he was “concerned by [DeMarco's] continued opposition” to principal reduction.

By yesterday afternoon, criticism for DeMarco’s decision abounded. Jared Bernstein, former Chief Economist and Economic Adviser to Vice President Joe Biden thinks DeMarco is grossly overstating the costs required to implement principal reduction because he is philosophically opposed to such measures:

“One can only conclude that he’s got a deep aversion to reducing principal. This is something you often see among bankers and lenders who view any sort of write down as the unacceptable breaking of a contract.”

Because an the analysis conducted by the FHFA involves so many assumptions as to the costs of implementation, and most importantly how many “strategic modifiers” the program would engender, one could conceivably make the analysis say whatever one wanted it to say. Certainly DeMarco’s critics are accusing him of doing just that. So depending on your point of view, DeMarco is either a courageous public servant, standing up for taxpayers in the face of unwarranted criticism, or a clueless bureaucrat blinkered by his irrational reverence for the sanctity of contracts.

MORE: Is Fannie and Freddie Honcho Ed DeMarco “America’s Most Dangerous Man?”

41 comments
econ1
econ1

Possibly because it would be incredibly unfair.  Thousands of others have seen the value of their home

decrease by the same percentage as those with underwater mortgages.  Maybe they used a smaller loan, or didn't take

out an equity line to buy a boat so they don't owe more than the house is worth

but they still suffered the same loss. How is it fair to give taxpayers money

to only the group whose value happened to go under the loan amount?

DeMarco seems like the only person in Washington that isn't running for office.

econ1
econ1

Possibly because it  is incredibly unfair. Thousands of others have seen the value of their home

decrease by the same percentage as those with underwater mortgages. Maybe they used a smaller loan, or didn't take

out an equity line to buy a boat so they don't owe more than the house is worth

but they still suffered the same loss. How is it fair to give taxpayers money

to only the group whose value happened to go under the loan amount?

joshwight
joshwight

Thousands upon thousands have lost their home including myself.   How can we now say "let's rescue the rest under water."   If we did that, do the ones that lost a home now get a refund of some kind.   No, what's happening now has to play it out naturally for all.    You can't appear to be fair only to the latest group.   What happens naturally will be fair to all.

ChickPeaA
ChickPeaA

As described in the article, too many unknown factors that make it impossible to determine which global economic approach, foreclosure or loan forgiveness, is best.  The obvious solution is to make foreclosure an efficient low cost process.  On a case by case basis, the market would determine if foreclosure or principal reduction is optimum.  

saetn
saetn

 What I would like to see is how the costs of this principal reduction

idea compare to the costs associated with the bank bailout and the GM

bailout. I've seen a bunch of different figures that say the bank

bailout cost taxpayers anywhere from $700 Billion to over  trillion

dollars. The GM bailout gave them $50 billion plus $45 billion in tax

credits. So...how does principal reduction compare? Is it more than

these other bailouts? Less? A lot of the problems with the banks and the

car companies were of their own making. A lot of people that have

underwater mortgages got that way not because of their own making, but

because of the games the banks were playing.  So...while I'm not in favor of bailouts, I

would rather help out people that bought homes and were able to pay on

the mortgages until the economy crashed because of the banks and they

lost their jobs (or even those still able to pay on their underwater

mortgages). If you're going to do bailouts...don't bailout the

perpetrators of the crime...bail out the victims....

saetn
saetn

 What I would like to see is how the costs of this principal reduction

idea compare to the costs associated with the bank bailout and the GM

bailout. I've seen a bunch of different figures that say the bank

bailout cost taxpayers anywhere from $700 Billion to over  trillion

dollars. The GM bailout gave them $50 billion plus $45 billion in tax

credits. So...how does principal reduction compare? Is it more than

these other bailouts? Less? A lot of the problems with the banks and the

car companies were of their own making. A lot of people that have

underwater mortgages got that way not because of their own making, but

because of the games the banks were playing.  So...while I'm not in favor of bailouts, I

would rather help out people that bought homes and were able to pay on

the mortgages until the economy crashed because of the banks and they

lost their jobs (or even those still able to pay on their underwater

mortgages). If you're going to do bailouts...don't bailout the

perpetrators of the crime...bail out the victims....

saetn
saetn

What I would like to see is how the costs of this principal reduction idea compare to the costs associated with the bank bailout and the GM bailout. I've seen a bunch of different figures that say the bank bailout cost taxpayers anywhere from $700 Billion to over  trillion dollars. The GM bailout gave them $50 billion plus $45 billion in tax credits. So...how does principal reduction compare? Is it more than these other bailouts? Less? A lot of the problems with the banks and the car companies were of their own making. A lot of people that have underwater mortgages got that way not because of their own making, but because of the games the banks were playing.  So...while I'm not in favor of bailouts, I would rather help out people that bought homes and were able to pay on the mortgages until the economy crashed because of the banks and they lost their jobs (or even those still able to pay on their underwater mortgages). If you're going to do bailouts...don't bailout the perpetrators of the crime...bail out the victims....

BriannG
BriannG

Here's the problem with his argument that too many fraudsters will take advantage.  We had wide open airport and visa security before 9/11, allowing known terrorists into our country.  After 9/11, grandmas are being strip searched.   Isn't there anything in the middle?  Can't we write down the values of these homes because the overpriced housing market has corrected itself. We bought a small condo but then lost almost half of its value in a nice neighborhood. Bank can have it now. I'm still pretty sure we made the right decision as we have more cash to spend with a rental and more space.

Theumprof
Theumprof

Two stories have been reported as separate events. Berhnake announces the  U.S.  economy is stalled.  and the media reports that  the head of the FHA  is obstructing  the very relief that is necessary to slow down the tidal wave of foreclosures that have swept over and continue to engulf the economy.  The  two stories are not separate. They are two sides of  a single coin of economic catastrophe:  The foreclosure tidal wave has swamped the engine of the economy and unless you stop the foreclosures the U.S.   economy has  no hope of restarting.

Every foreclosure removes a person paying taxes on the house.  It  displaces families.  It  also leads to all the housing values around the foreclosed home to  decline.  Each foreclusure is a domino falling. Unless we can stop the dominoes no recovery.  Why are several towns in California going bankrupt-its the foreclosures.  If nothing is done you will see state  that  is right entire state bankruptcies.    Also who wins in a foreclosure.  It takes years to sell a foreclosed house-which is a spoiling asset. When sold  the bank takes a  much bigger loss than simply reducing principle.Demarco's policy is driven by political ideology.  He should be fired. Washington needs a robust forgiveness programs. One homeowners have equity they will have money to spend. That is the only stimulus plan that will work.

Cleggg
Cleggg

 You're looking in the wrong place. The problem is systemic - a corrupt banking system sustained by our elected officials (both left and right), home loans granted to people who couldn't afford them, debt packaged into fraudulently represented derivatives, and still no reform of the laws that allowed all this to happen. These fraudulent activities will continue until Paulson and Geitner finally deliver our country into the hands of a very few wealthy power brokers. Why, oh why, does Obama keep these two men as his closest financial advisers? Because power has corrupted our political system, and "we the people" are no longer in charge. Goodbye USA.

MikeCR
MikeCR

Principal reduction should only occur if there is also equity reduction.   

If the lender is going to reduce the principal owed by 20%, then the lender becomes a 20% owner in the house.     

Bilosopher
Bilosopher

Contracts are re-negotiated all the time. It's laughable that a banker is whining about upholding the so called 'rule of law'. Screw the people and save the fraudulent banks who are engaged in an ongoing criminal enterprise.

Rule of Law? Kiss my a**.

rdl114
rdl114

Dueling analyses. Pick your poison. Underwater owners default and foreclosure ensues. That has a reasonably comprehensible cost. We will bear the cost as taxpayers regardless of our individual prudence or lack thereof. If there is a savings of $1.7 billion, why wouldn't we want it? Perhaps, to make things fair, once the housing market gets straightened out, why not add a second mortgage that encompasses new equity that hopefully would accrue to the underwater mortgages in question? Such a second mortgage would kick in in X number of years.

walstir
walstir

“severely underwater homeowners are much more likely to default on their loans than are those who have some equity”

Some will default; but the mortgages of the remainder can be quite valuable. Someone who could afford their mortgage when they originally signed the mortgage and is still holding the same job and making the same salary is unlikely to default.  Owing a lot more for your car than the car’s current value does not necessarily mean that you are going to default on your car payments.  Defaulting involves a lot of penalties - even if you live in a non-recourse state.  You are going to be evicted, forced to move to rental accommodation and have your credit rating trashed.  Many underwater borrowers are going to keep on paying given the high cost of defaulting.  Since being underwater prevents borrowers from refinancing, the lender is going to continue getting higher interest payments than he would receive if he wrote down the principal to the point where the borrower could refinance.  For lenders with high quality underwater mortgages, writedowns mean loss of principal plus reduced interest.

Cleggg
Cleggg

"... irrational reverence for the sanctity of contracts."Reporters who inject their deep ideological biases into "impartial" reporting should find another line of work. Many of the comments below are spot on. DeMarco, and other liberty-minded government workers, should be given a medal. It's despicable power-abusers like Geitner and Paulson who are the bad actors in this drama. And by extension Obama, who (for who knows what reasons) keeps these guys as his key advisers.

Hank Rodgers
Hank Rodgers

His cited fear of use by "strategic modifiers" is significant; and of course he probably only objects on the basis of his idealogy, and only as to use of this kind of "strategy" by individuals, and not, as so commonly done, by bankers and other corporations and organizations. WELL THEN, SIMPLY DISQUALIFY INVESTOR-OWNERS FROM THIS PROGRAM! What is only "good business", if done by business, is "bad business" if it benefits consumers, employees or the working middle class. FIRE HIM!

Jeanabella
Jeanabella

Ed DeMarco is a Bush leftover! He's not helping the economy but he is on the side of the banks amp; based on the behavior of the banks, I don't trust them to be honest amp; fair with anything.

"sanctity of contracts" is almost laughable if I didn't believe they believe that. The banks are delusional and really think they have god like powers. I'll be thrilled when they are regulated again amp; some of these jackasses are put behind bars! Bernie Madoff isn't the only sociopath in that group.

Some of the comments I've read here smack of ignorance and that's sad. Banks are not deserving of our defense.

KingKandyKush
KingKandyKush

Did your interest only loan recast and now you want the responsible to bail you out?

franfetch
franfetch

my

classmate's sister-in-law brought home $13491 a month ago. she makes

money on the internet and moved in a $439900 home. All she did was get

lucky and work up the information explained on this web site http://www.LazyCash49.com

KingKandyKush
KingKandyKush

I'm starting to think all these journalists and pundits are a bunch of mortgage deadbeats themselves considering all the bailouts they scream for and total disconnect regarding this and the public.

cs100
cs100

I doubt that the romans would have used tax dollars to bail out privately owned banks who got caught in a bad, illegal, fraud riddled, gamble. No I pretty sure they would have taken a few heads and let them fail.

Rus
Rus

Has half of America lost its collective mind?  Mr. DeMarco is exactly right, and one of the few people talking in the US Housing crisis with a sane voice.  The basic concept of "hypothecation" - pledging your assets in return for getting a loan of money - is a concept that was invented by the Romans, and it served them well.   Roman law still underpins much of our legal system.  And of course, the problem with hypothecation, is that when borrowers can't (or simply won't) pay up, they often try to welsh on their contract.  That is why we need sherrifs, judges and courts.   Mr. DeMarco is making a very key point when he clearly indicates that the costs associated with having the Government mess with the basic mortgage contract, may substantially exceed any benefit the "principal reduction" program could possibly have.   But it is not just about upfront, visible costs.  If the US Treasurer can order that mortgage contracts be fiddled with, to help out "voters", then Mr. Timothy Geithner, as Treasury Secretary has just damaged the basic foundation of the American commercial economy!  As a non-American, I still have a deep and vested interest in American not destroying itself.  Americans are trading partners, friends, and even family members.  I am Canadian, but I want to see America prosper and remain a stable nation of freedom and sanity.  So, folks, please understand that Mr. DeMarco is doing his job as a regulator.  He is 100% right.   Destroying the integrity of mortgage contracts is probably worse for an economy than counterfeiting money, dishonest trading, or tax cheating.

Assume your neighbour gets a 30% principal reduction on his mortgage.  He was behind on his payments,and was crying the blues.   And the government fiddles his loan.  You find out.  What is your most rational response?  Stop making your payments also, and try to get the same deal!   Review his paperwork, determine the pre-qualifications, and if necessary, hide some assets.  Then submit the same claim in an attempt to achieve the same benefit.  DeMarco has done the math, and has pointed out to Geithner that the consequence of a so-called "debt-forgiveness" program could trigger another significant round of mortgage default activity in the USA.  WELL OF COURSE IT COULD!   It is almost certain to!

There already is the HAMP program.  There are various forebearance programs in effect, and many borrowers are taking advantages of these.   But so-call "principal reduction" is a blindly stupid idea, that rewards the bad behaviour of some, while effectively punishing those who played by the rules.   Geithner is probably not a fool, so I must conclude that it is Mr. Geithner who should be fired, and the sooner the better.  He is trying to defraud all those who are current on their mortgages, and as such, is not fit to be Secretary of the Treasury.  I don't like Mr. Romney very much, but with an fellow like Geithner as Treasurer, if I were an American, I would have to vote Republican, no question.  

It is critically important - especially during a time of crisis - that basic law and system integrity be maintained.  Mr DeMarco is speaking clearly to this requirement, and should be supported by all those who can see the obvious, and think with any clarity.

- Rus

Jeanabella
Jeanabella

Rus, did the banks get paid on the mortgages they sold to their investors? Did the banks help cause the recession? Do the banks make money when a homeowner goes to foreclosure? Why wouldn't the banks refinance to keep a home from foreclosure? After all, didn't the taxpayers bail the banks out? 

HAMP program could have worked for many but the banks fraudulently breaking agreements with many who have qualified for the program. You can read about it daily. There are class action suits around the country against the bad behavior of the banks.As for your Roman Empire analogy, really? Put Glass Steagall back in place as even bankster Sandy Weill said recently, so the banks are prevented from risky investments like the ones that put us all in jeopardyFor the good of all, the right thing to do for families amp; communities is to keep people who are paying their mortgage in their homes. Lumping all the homeowners who are having a hard time with low value high mortgages as deadbeats is not a legitimate argument for not doing the right thing for the American taxpayer. So if you were lucky enough to get a fair mortgage amp; lucky enough to keep your job and lucky enough that the job you have pays you a fair wage, good for you, but does that mean that no one else should get help?When Trump files Bankruptcy 4 times, it's OK, but if a regular working person has lost their job and or had to deal with cancer or the like, wants to file bankruptcy to reorganize amp; keep their home amp; get back on their feet, that's not OK. Congress passed law that homeowners cannot include mortgage in bankruptcy anymore. That's just for the rich don't you know.Walk in the shoes of your fellow Americans before you stand with the most fraudulent group of banks ever! We would be smarter to stick together and have a stronger voice, because between the Insurance industry amp; banking lobby we haven't got a prayer.There but for the grace of circumstance go thee.

ChickPeaA
ChickPeaA

There are arguments for fair legal settlement of cases involving fraud, support for Glass Steagall, the need to recognize the adverse economic situation of many Americans, and the need to recognize the malignant impact of bank and insurance lobbying.  However, there are no arguments that support the need to reduce principal.  Also, I don't understand why someone who pays their mortgage is at risk for foreclosure.  The taxpayer should bail out banks who are likely to pay the taxpayer back with interest, but the taxpayer should not bailout those facing foreclosure who are unlikely to the taxpayer back.

cs100
cs100

Even if there underwater and still paying its a problem, they cant move, or refi and they are throwing away there money. At some point life happens and they need to move on. Then the fhfa will allow a short sale or deed in lieu..which all amounts to a principal reduction. Geithner himself said these programs are just to "foam the runways"and slow down the rate of foreclosures to help the banks. Its never been about whats best for america, tax payers or homeowners. Obama is to blame for all this. He had control of congress for two years and chose to do nothing and replace no one. Its time to rip off the band aid and fix the problem, provide justice to people who live in areas where all these fruadclousres occurred, OR sit it out for the next several decades and hope. Might be we should also look into arming ourselves since we have all been sold to wall st and are now slaves to the bailed out banksters.

Jeanabella
Jeanabella

No, PBO did not have control of Congress for 2 years! 

"Before I accuse anybody of being unbelievably forgetful, I will admit that I can’t remember what I had for breakfast today. Being forgetful is not a crime. Lying is sometimes a crime, but when you lie on internet political blogs, that’s not a crime. However, it should tug at your conscience a bit." 

http://cjonline.com/blog-post/...

cs100
cs100

FYI in 2010 he lost control of congress, and the senate. He won in 08.. 08-10 is 2. Suck up to him all you want his actions speak louder then his fabulous speech's.  Geithner has said all these hamp programs were never meant to save homeowners they were just supposed to "foam the runways" and slow them down a little bit to help out the banks. Obama has never been for the middle class he is all wall st.

Jim_Satterfield
Jim_Satterfield

Meanwhile, in the real world 60 votes in the Senate when part of them are the southern Blue Dogs who vote with the Republicans on many issues and let their filibusters stand in others, are not absolute control. The Democrats don't march in lockstep as well as the Republicans.

Sean Bell
Sean Bell

So the idea is to set up another bureaucracy to take money from the many and give it to a few.  Opening up a new teet on the pig?   Why would anyone worry that graft and corruption could be a problem with so many people hurting?  I really don't get what is so new about this idea.  The government has been playing Robin Hood for a century now.  Their hopes this time of using our future money in an attempt to re-inflate a housing bubble caused by a previous bubble, that priced itself out of existence for a reason, is the rantings of a gambling addict that is convinced all they need to do is double-down the bet and it will undo all of their previous bad decisions.

Does anyone really believe that the government, or the banks, want to find out what all of that paper and property that they are holding is worth today?  They LIKE not knowing.  And in the case of the banks, it is essential, or they go belly-up.

Paul Price
Paul Price

DeMarco is doing the job he was hired to do- protect the assets of FNM and FRE.

Upholding 'Rule of Law' is critical to a functioning society regardless of how the occupant of the White House feels.

Spice54
Spice54

"... irrational reverence for the sanctity of contracts."  If that makes sense to you, you are the problem.  No adherence to contractual obligations equals no ownership which leads to government owning all.

Jim Mn
Jim Mn

All I know is that if the idiots that way overspent on their houses are rewarded with principal reductions while I bought conservatively I'm going to be really annoyed. I will vote against any politician, Democrat or Republican that pushes that through. Real estate values are not declining nearly as fast, and in some areas are going up again. Let the market work itself out.

Jeanabella
Jeanabella

Hey Jim, you sound like Mitt "let Detroit go bankrupt"! Yes, that's the ticket. 

ChickPeaA
ChickPeaA

The car companies did go bankrupt as advised by President Obama, (Chapter 11).  This was a good decision because it allowed the restructuring needed to make the companies more successful.

Cleggg
Cleggg

 Jeanbella, as heartless as this is going to sound, yes -- let the failing cities go bankrupt, start over clean. It's happening in California (Stockton, Vallejo, and many more coming) and other states. We, the taxpayers, cannot keep bailing out failure, or as another commenter called it "doubling down on bad bets."

Let's take the haircuts, cut our collective debt back to a manageable level, and start again from a healthier place ---- the problem is: unless we fix the banking regulations that allowed these failures in the first place, NOTHING is going to change. Our politics (left and right) are bought and paid for by the highest corporate bidders.

Dan Gramza
Dan Gramza

The "supporters"  have no clue...   Let's take taxpayer TARP money and give it away and it never comes back ever

Jeanabella
Jeanabella

http://www.credit.com/blog/201...

TARP paid back! 

Who hasn't a clue?

cs100
cs100

wrong again.. roughly have has not been paid back and probalby wont.

http://projects.propublica.org...

Cleggg
Cleggg

The Propublica data is correct. About 1/2 the TARP funds have yet to be repaid, but government accounting hides this reality. To her credit, Jeanbella's source is also accurate, but it only addresses certain recipients (about 1/3 of the bailout money).

miltfarrow
miltfarrow

They need to lose their heads , that would stop the pimps and whores-We need a major investment in guillotines !