BLOG VIEW: In a March 25 interview with the Financial Times, Edward DeMarco, the acting director of the Federal Housing Finance Agency (FHFA), repeated his long-standing refusal to consider the introduction of principal reductions into the Fannie Mae and Freddie Mac mortgage holdings.
‘If you do principal forgiveness, who is it benefiting?’ DeMarco asked, adding that such a strategy would ‘protect the big banks’ but leave the government-sponsored enterprises (GSEs) open to significant risk.
Two months before that, in a letter to Rep. Elijah Cummings, D-Md., the ranking member of the House Committee on Oversight and Government Reform, DeMarco explained his reluctance to embrace principal reduction situation stems from the problems that the GSEs face in dealing with a glut of underwater mortgages.
‘Putting this determination in context, as of June 30, 2011, the enterprises had nearly 3 million first lien mortgages with outstanding balances estimated to be greater than the value of the home, as measured using FHFA's House Price Index,’ DeMarco wrote. ‘FHFA estimates that principal forgiveness for all of these mortgages would require funding of almost $100 billion to pay down mortgages to the value of the homes securing them. This would be in addition to the credit losses both enterprises are currently experiencing."
On April 10, however, DeMarco was whistling a different tune. In a speech before the Brookings Institution in Washington, D.C., he stated that the FHFA was analyzing the possibility of embracing the once-taboo write-downs.
‘[While] Fannie Mae and Freddie Mac might apply principal forgiveness, it would have to be clear and transparent, having a basis in the conservatorship mandate,’ he said, noting that the agency could possibly save as much as $1.7 billion if it accepted enhanced incentives to the Home Affordable Modification Program being pushed by the U.S. Department of the Treasury.
Thus, DeMarco went from arguing that principal reductions would damage the GSEs and cost $100 billion to speculating that the same reductions could actually stick an extra billion into the FHFA's piggy bank. And you thought Mitt Romney was a flip-flopper?
Peter S. Goodman, The Huffington Post's business editor, has referred to DeMarco as ‘the single largest obstacle to meaningful economic recovery.’ While Goodman's hyperbole is clearly in overdrive, he is correct in noting that DeMarco appears to be more of a problem than a solution. This is not the first time that DeMarco did an astonishing 180-degree spin with FHFA policy (i.e., his initial defense of XXL-sized GSE executive bonuses gave way to a new era of somewhat less flashy take-home pay), but the mixed signals being sent out on this very important issue are especially troubling.
In an article that will be running in next month's edition of Secondary Marketing Executive, industry experts voice their concern about the possibility of FHFA-approved write-downs. Here's a sample of what's being said:
‘Price reductions should be on a case-by-case basis, not broad based,’ says David Kittle, past chairman of the Mortgage Bankers Association and the Washington, D.C.-based senior director of industry relations for IMARC. ‘It should be decided by the lender, servicer and investor.’
‘This conjures up some form of the moral hazard issue,’ says Bob Dorsa, president of the American Credit Union Mortgage Association. ‘I would hate to think that we would put homeowners up against each other because someone got their principal reduced. People would believe that others got preferential treatment because they stopped making their mortgage payment.’
‘Principal reduction represents a fundamental change to the legal structure of the mortgage market,’ warns Dr. Linda M. Hooks, professor of economics at Washington and Lee University in Lexington, Va. ‘It could have long-term repercussions.’
DeMarco, of course, conveniently forgot to mention two other parties who benefit from principal reductions. The first is DeMarco himself. With rising pressure from congressional Democrats that the White House fire him, and with U.S. Department of Housing and Urban Development Secretary Shaun Donovan openly telling reporters that the administration wants to ‘get someone in [the FHFA] who shares our view,’ DeMarco has his back to the proverbial wall.
And when you see the level of pressure being placed on DeMarco by the administration to shift FHFA policy, it is not hard to recognize the other party that reaps immediate gains from this change of course.
‘It will help the president,’ observes Adam Leitman Bailey, New York real estate attorney and law professor at New York University. ‘But it will not help the economy. Most programs since 2008 have not helped in any way, except to assist underwater borrowers who cannot afford homes.’
– Phil Hall, editor, MortgageOrb
(Please address all comments regarding this opinion column to hallp@mortgageorb.com.)
