Ed DeMarco may not strike you as the kind of man who is capable of fanning the outrage of broad swaths of the American public. But in the past year, this bespectacled economist and lifelong civil servant has endured protesters picketing outside his home, journalists labeling him “America’s most dangerous man,” and now 45 members of the House of Representatives and nine state attorneys general are petitioning the President of the United States for his dismissal.
So what has the acting head of the Federal Housing Finance Administration — the federal agency in charge of housing giants Fannie Mae and Freddie Mac — in so much hot water? It’s his continued unwillingness to experiment with principal reduction for underwater homes. Proponents of this policy argue that reducing the amount owed on mortgages where the homeowner owes more than the home is worth is a win-win, because it greatly reduces the chance that the home will end up in foreclosure. And foreclosures are such a costly process that forgiving just part of the loan could end up saving money for the lender and keep the homeowner in his home, which is a boon for local housing markets. And remember: In the case of a Fannie- or Freddie-owned loan, the lender is the American taxpayer.
This all sounds great, but DeMarco isn’t buying it. Even in the face of analysis that showed that implementing principal reduction would actually save taxpayer money, DeMarco refused to go along, arguing that such a program would lead so many people to purposefully default on their mortgages, that it would cause more harm than good. These so-called “strategic defaulters” are the unknown variable in this plan. If you assume there will be many of these people, then the program doesn’t make sense. If you assume there will be fewer, it does. But it’s very much unclear how anybody can accurately predict how many strategic defaulters there would be, because such a program on a widespread level has never been tried before.
And this is exactly why this debate over principal reduction has broken down along such ideological lines. Supporters of principal reduction think that DeMarco is imposing needless pain on the economy and American citizens because of a nearsighted, moral aversion to debt forgiveness. Supporters of DeMarco see him as a brave public servant who refuses to bow to pressure from interest groups for yet another wasteful bailout of irresponsible parties.
But wait, you may ask, why do we even need such a program? Isn’t the housing market finally in recovery mode with home prices rising for the first time in years? Well, yes, the housing market has bottomed, and prices have begun to rise. But the real estate market was so badly damaged by the subprime crisis that, by any measure, we still have a ways to go before you can call the real estate market healthy — and many homeowners who bought property towards the height of the bubble won’t emerge from underwater for many years. According to data released yesterday from CoreLogic, 10.4 million homes remain underwater. That’s 21.5% of all homes with a mortgage, and this is after 1.7 million homeowners returned to a state of positive equity in 2012.
So if proponents of principal reduction are right, this is still a much needed policy that could keep people in their homes, further bolster the housing recovery, and save the federal government some much-needed dough.
The question now is whether President Obama will finally remove Ed DeMarco and install someone who is amenable to principal reduction. The main reason he hasn’t done so already is that installing a permanent head of the FHFA would require Senate approval. And any nominee that could withstand a Republican filibuster would probably have to disavow any plans to initiate a principal reduction programs, as Republicans — at least in the House — have been very skeptical of proposed principal reduction schemes.
Some have suggested a recess appointment — a controversial tactic for filling vacant positions without Senate approval — but shortly after the election unnamed Administration sources said the President wasn’t willing to sour relations with the Senate by so doing. A more recent report from Bloomberg News has unnamed Administration sources suggesting that it is considering North Carolina Representative Mel Watt for the position, along with Treasury officials who have experience in housing finance.
In any case, speculation over who might succeed DeMarco is a distraction from the more important question at hand: Is principal reduction really a good policy option? Sure, private lenders have made some strides toward reducing the amount owed on underwater mortgages. But the successes have been extremely limited. The Administration’s HAMP program has helped 1.1 million homeowners reduce the amount they owe, eliminating $9.2 billion in negative equity. And last year’s $25 billion mortgage settlement between states attorneys general and some of that nation’s largest banks has so far resulted in $6.04 billion in first-lien principal reduction. These numbers may seem large, but again, the U.S. real estate market has 10.4 million underwater homes and $628 billion in negative equity. So efforts to get the private sector to write down debt — while helpful to those who have gotten relief — have fallen way short of having a substantive effect on the economy.
And there are political concerns that advocates of principal reduction tend to ignore, namely, what will the public backlash against such a program be? For such a program to actually save the federal government money, it would require Fannie and Freddie to find the people most underwater, and give them what some will inevitably describe as a handout. One can imagine the field day the conservative media would have tracking down these people and profiling them as the latest recipients of government largesse. And what about the folks who are underwater, but Fannie and Freddie determine aren’t enough so that they are really in risk of default? What about the people who had their equity wiped out but aren’t underwater?
In other words, when the private sector conducts these sort of programs, they can do so only concerned with its affect on their profits. But the government must always consider the idea of fairness as well. And I’m sure there are plenty in the Obama Administration who would like to simply avoid the political headaches that come with opening such a can of worms. Especially when they have Ed DeMarco to take the heat for them.