Why DeMarco Won’t Allow Principal Corrections Despite Instructions

Housing Regulator Defies White House

Obama’s Next Move Unknown

Editor’s Comment and Analysis: It’s unanimous! Except for DeMarco, the housing regulator who won’t let Fannie and Freddie cooperate with principal reductions. Why not?

“The Federal Housing Finance Agency’s own analysis has shown that principal reduction could help up to 500,000 homeowners and save taxpayers as much as $1 billion, Geithner wrote to DeMarco. It could save Fannie Mae and Freddie Mac, the government-controlled mortgage giants that DeMarco is preventing from offering principal reduction, up to $3.6 billion, he said.”

The reason is that Fannie and Freddie are actually creatures of Wall Street. And under the now debunked too big to fail theory, a reduction of principal is bad. Mind you this reduction is only a correction to reflect two things: (1) the appraisals were fraudulently inflated just like the rating companies did with the bogus mortgage bonds and (2)  PAYMENTS received but which are going into the bottom line of the mega banks instead of repaying the lenders.

The reason why the Banks are fighting this tooth and nail are many. But the trigger that they fear is that when the loans are written down, more than $150 trillion in fake “cash equivalent” instruments will disappear and they would need to correct their balance sheets and profit and loss statements to reflect the fact that this whole securitization thing was a sham.

This is the last gasp of Wall Street using a regulator who for reasons of personal ideology or personal finance (or both) can still be manipulated into avoiding the one correction that would bring the entire housing market back, return equity to homeowners (or at least give them a  fighting chance to get to equity in their homes) and stop the drag on the economy.

So it all comes down to this. Who is more important — the banks or the people of this country. Even if you are ideologically opposed to reductions or corrections you must realize that this plan results in a decrease in taxpayer losses. Why would you want anything else when the alternative costs more, leads to bigger government, and will lead the economy to the next recession/depression?

DeMarco’s ideological response is that the correction would lead to a “moral hazard” leading to other people who stop paying their mortgages. They should stop paying but they won’t — because deep down inside homeowners want to do the right thing. And even though I think they are wrong, they believe that the right thing is to pay their debt — even if someone has already paid it through bailout, Fed purchases, insurance, credit default swaps etc.

DeMarco’s response was clearly scripted by Wall Street who are the titans of “moral hazard.” They took booming economies and reduced them to rubble. The bottleneck is at the Banks and the answer is that DeMarco can and will be fired, the Banks will be taken down into sizes that enable regulators to control them, and the economy will eventually recover.

Ed DeMarco, Top Housing Official, Defies White House; Geithner Fires Back

Demarco

In a move that brings two federal agencies as close to warfare as possible within the confines of bureaucratic memos, the Treasury Department called out housing regulator Edward DeMarco on Tuesday for his continued refusal to offer a key piece of housing assistance to underwater borrowers struggling to save their homes from foreclosure.

The Federal Housing Finance Agency’s own analysis has shown that principal reduction could help up to 500,000 homeowners and save taxpayers as much as $1 billion, Geithner wrote to DeMarco. It could save Fannie Mae and Freddie Mac, the government-controlled mortgage giants that DeMarco is preventing from offering principal reduction, up to $3.6 billion, he said.

The response was timed to coincide with DeMarco’s latest letter to Congress, in which he reaffirmed his opposition to principal reduction, a form of loan forgiveness championed by many housing advocates and economists. DeMarco wrote that his agency’s analysis found that the taxpayer benefit of writing down the mortgage values of some loans “would not make a meaningful improvement in reducing foreclosures in a cost effective way for taxpayers.”

This is not the first time DeMarco has irked the Obama administration. As the acting director of the federal overseer of Fannie and Freddie, DeMarco has broad powers to set policy at the companies. The Obama administration — especially Treasury — leaned hard on DeMarco to agree to allow the five banks that signed on to the national mortgage settlement in March to write down the roughly 50 percent of all loans they service that are owned or backed by Fannie and Freddie.

DeMarco said no. He has also resisted entreaties to allow borrowers who obtain a loan modification through the Home Affordable Modification Program, or HAMP, which Treasury administers, to allow loan forgiveness as part of the modification in some circumstances. It is the analysis of whether principal reduction offered through this program would help or hurt taxpayers that is the center of the dispute between Geither and DeMarco.

In the letter sent Tuesday to Congress, DeMarco said that projected benefit to taxpayers is $500 million in the best case, and that most of this aid would go to homeowners who haven’t made a mortgage payment in more than a year.

“Experience dictates that the likelihood of successfully modifying and reinstating these loans is small so that the anticipated benefit is likely to be much less than $500 million,” he said.

The housing regulator also restated his position that allowing some homeowners off the hook for some of what they owe would pose “a moral hazard.”

“This could give borrowers who are current on their mortgages a message that the government endorses forgiving a portion of mortgage debt if hardship can be demonstrated, creating a very broad incentive for underwater borrowers to seek ways to become eligible.”

He also repeated his argument that steps Fannie Mae and Freddie Mac are already taking, such as reducing the interest rate on loans and offering to postpone, or “forbear,” mortgage payments, will help struggling borrowers without posing the moral and financial hazards that come with reducing the value of a loan.

Geithner struck back at that analysis, claiming that DeMarco omitted key details in order to stick to his guns on principal reduction. Even if the longer-delinquent loans that DeMarco referenced are not a part of a program, there are still 300,000 borrowers who could participate in a loan forgiveness program at zero cost to taxpayers, Treasury said.

“[A]s we have discussed many times, the use of targeted principal reduction by [Fannie and Freddie] would provide much needed help to a significant number of troubled homeowners, help repair the nation’s housing market and result in a net benefit to taxpayers,” Geithner wrote.

The Federal Housing Finance Agency has overseen the mortgage giants since they were bailed out in 2008, part of the early fallout from the mortgage crisis. Since then, taxpayers have spent roughly $188 billion to prop up the companies, according to the regulator.

Elijah Cummings (D-Md.), one of DeMarco’s fiercest Congressional critics, said in an email that he believes the regulator is behaving recklessly.

“It is incomprehensible that Mr. DeMarco would reject the chance to save up to a billion dollars in taxpayer funds while helping nearly half a million homeowners stay in their homes,” Cummings said. “He should immediately withdraw this reckless and misguided letter and start following the law Congress passed.”

DeMarco’s continued refusal to allow the two mortgage giants to offer loan write-downs has prompted a growing chorus of critics to call for his resignation, or for Obama to fire him.

“If Mr. DeMarco will not change his mind, we need to change his job — and today we’re once again calling on President Obama to fire him,” said Natalie Foster, the chief executive officer of Rebuild the Dream, an advocacy group.

A White House spokesman referred a query to the Treasury Department.

see entire article at War at the White House Over Principal Reduction

13 Responses

  1. Good news, I now have a shorter link for the Debt Neutrality Petition.
    It’s free to check out, and free to sign as well. http://www.debtneutralitypetition.com

  2. […] Read more… Posted in Banks, MERS, News Around The Country, States « TWO-DAY “COTA” WORKSHOP CHICAGO, IL SECURITIZED DISTRUST – PART TWO » You can leave a response, or trackback from your own site. […]

  3. People MUST understand that loans sold to Fannie/Freddie were falsely placed in default, with collection rights sold, insurance collected. These “collection rights” were securitized into the bogus MBS trusts we now know as “toxic assets.” Who invested in these toxic MBS?? Big investor was Fannie/Freddie. Why?? Because they paid a higher interest rate than Freddie/Fannie could have achieved had they retained the whole loan.

    The securitization process conceals who the real “investors” are. As a security investor in the toxic MBS, Fannie/Freddie is not the lender/creditor/investor. We need to open Fannie/Freddie default records, and accounting records. FHFA has blocked this — and government does nothing.

    GIANT COVER-UP.

  4. DeMarco is a liar and he is acting “unconstitutionally”.

  5. The crimes against humanity that have been committed by the banks and Fannie/Freddie are the greatest “moral hazards” ever.

  6. Moral Hazard?????????????Who is he kidding. What they have done is what we call MORAL HAZARD not what they will do to correct the MORAL HAZARD they have created. Geeweez! Do they really believe what they are saying?

  7. DeMarco is a santanic bastard who would inflect pain on his own grandmother. There are many retired seniors who depend on their home and equity to live. Just remeber DeMarco still makes his $ 500 K per year and has no worries. FIRE and JaIL his dirty ASS !

  8. @BSE,

    Stopping payment of all Fannie and Freddie is not enough. Sue first. Then stop paying.

  9. Naked Capitalism take on firing DeMarco…

    Tuesday, July 31, 2012

    Why “Firing Ed DeMarco” is No Solution to FHFA Refusal to Engage in Principal Modifications (Updated)

    Today, Acting FHFA Director Ed DeMarco wrote to Congress, after due consideration, reaffirming his position that he will not permit Fannie and Freddie to lower principal balances of mortgages of borrowers that are delinquent. This is despite the fact that the top analyst in this space, Laurie Goodman, has determined that principal modifications are the most effective form of mortgage modification, resulting in much lower refault rates than interest rate mods or capitalization mods. And that makes sense. Why should a borrower struggle to hang on to a home when even if they make all the payments, when they sell they they are stuck with a big tax bill? And as we’ve stressed, private label investors are overwhelmingly in favor of deep principal mods for viable borrowers, and that’s because foreclosure is costly and leaves them worse off.

    So it’s more that a bit puzzling to see DeMarco nix principal mods, particularly in light of a Treasury program that provides subsidies to investors of 18% to 63% of the amount forgiven, depending on the loan to value ratio of the loan. With those kinds of bribes subsidies, how could DeMarco say no?

    Well, DeMarco has. His logic is twofold. First, bag considering the subsidies, they are just a transfer from one pocket (Treasury) to another (Fannie and Freddie) and therefore don’t count as far as the conservatorship mandate of saving taxpayer dollars is concerned. Second, he goes into dueling model mode, and not being able to see his model an d model assumptions, one can’t tell how hard his team has gone in tweaking assumptions to produce the desired result. (if I get my hands on his 18 page letter, which I’ve seen referenced but not posted, I will update the post if it gives more insight on this matter). He concedes in his letter that if you do mods for borrowers that are now delinquent, you see a “small” net benefit (Treasury claimed $1 billion even after the cost of subsidies, it would be telling to see what DeMarco came up with). However, he contends the taxpayer could come up much worse off if people who were current defaulted in order to qualify. His bottom line: “We concluded that the potential benefit was too small and uncertain, relative to the known and unknown costs and risks.”

    As much as this blogger is firmly of the view that this is a poor economic decision (deep principal mods are a sound idea, as long as you have a decent approach for vetting borrower income and other debt payments to see if they are viable with a mod), I have to hand it to DeMarco as a bureaucratic infighter. He is effectively throwing the abortion of HAMP results in Treasury’s face. Recall that HAMP did not require borrowers to default in order to qualify for mods, yet many did out of misdirection by servicers. Now in fact, servicers are unlikely to play that game this time, since a principal mod reduces their servicing income. But the fact, as detailed by Neil Barofsky in his book Baiout, that Treasury was indifferent to how homeowners fared under HAMP, and merely saw this as a vehicle for “foaming the runway,” meaning spreading out the number of foreclosures over time, rather than saving borrowers, led to irresponsible actions (like ordering servicers to sign up people for trial mods initially without even qualifying them), numerous changes in program design (disastrous for highly routinized servicers) and lack of concern with the fact that many people lost their homes by virtue of HAMP who might have kept them, has produced some data (in particular, informed estimates of the number of people who defaulted to qualify for HAMP) against the Administration. And notice in its speedy rebuttal letter to DeMarco, Geithner concedes that DeMarco has the power to take this action: “…you have the sole legal authority to make this decision.”

    One might wonder why DeMarco is being so intransigent. I am told that he is an old fashioned public servant (as opposed to the tail his opponents are trying to pin on him, that of being a Republican hack), which means he may well believe the strategic default meme (from everything I can tell, this is vastly overblown with primary residences, but is a real phenomenon with second homes. And even with a second home, the damage to one’s credit record alone is a substantial deterrent). What does appear to be different in this crisis is that people who are current on all their obligations will default on their homes. That is interpreted to be a strategic default. But the word from attorneys and mortgage counselors is that these are anticipatory defaults: borrowers who were already under some duress took another reversal, and could see that hitting the wall was now inevitable. Rather than default when they were totally out of money, they default when they still have enough left to at least cover moving costs and a rental deposit.

    Needless to say, the Administration stalwarts are up in arms, calling for Obama to fire DeMarco. They might as well yell at the tide. It actually discredits them to rail like this, in that it reveals a failure to do basic homework. First, both the White House and DeMarco have said as the head of an independent agency, he can’t be fired. Second, even if DeMarco were to conveniently disappear, a new appointment would have to be approved by the Senate. Recall what happened with the CFPB. Senate Republicans blocked the nomination of Richard Cordray; Obama had to install him as a recess appointment. Given that Fannie and Freddie are pet demons of the Republican base, not just party stalwarts, the Republicans would more likely to play games to keep the Senate officially in business to stymie a recess appointment than they did with the CFPB (as much as they were not keen re Cordray, he did not merit the sort of pitched battle that an Elizabeth Warren nomination would have elicited).

    So what would happen if DeMarco disappeared and there was no new permanent replacement? Another acting director would be chosen from among the four current deputy directors. They have similar views to DeMarco, and I’m told they’d fight Treasury at least as hard as he has.

    The way to beat this is not via taking out a contract on DeMarco, it’s in doing a better job of promoting the merits of principal mods and debunking the “deadbeat borrower” meme. But here, the soi disant left has preached to the converted rather than trying to make headway with the broader American public. There is enough distress in the heartlands and enough well warranted antipathy for banks that it ought to be possible to make inroads on this front. But with Obama and Geithner dyed-in-the-wool neoliberals in charge, the failure in messaging comes from the top.

    Update 7:00 PM: Adam Levitin points out, per Ezra Klein, that Obama could get rid of DeMarco via simply making a permanent appointment on a recess. Technically true, but Obama had that option to him long ago, in fact back in 2010 when the Senate let his appointee Joseph Smith hang in the breeze and Smith withdrew. And he also could have done it earlier this year, when DeMarco first made his opposition to principal mods clear (he deferred taking a stand as long as possible).

    To replace DeMarco at this juncture would be waving a red flag in front of Fannie and Freddie hating Republicans, and would bolster Romney’s campaign by giving them a solid anti-Obama talking point. And the reality, as we indicated above, is that Obama has never been serious about helping homeowners. He’s never crossed swords with the folks who demonize borrowers in distress, never had any of his minions get tough with recalcitrant servicers. He has plenty of latitude to make an impact, and the only thing he threw his weight behind was the cosmetic, bank-serving mortgage settlement. He’s clearly made the calculation, and he has determined he is well served with DeMarco in place as a scapegoat.
    Read more at http://www.nakedcapitalism.com/2012/07/why-firing-ed-demarco-is-no-solution-to-fhfa-refusal-to-engage-in-principal-modifications.html#YhVZEglOlMhfKefu.99

  10. Everyday, we pay the banks ONE BILLION DOLLARS just on the interest for 3 trillion dollars of consumer debt. If this debt continues, there will be nothing more than tiny hiccups of recovery, followed by a lot of gloom and home foreclosures. That’s why if people could get behind the concept of Debt Neutrality, they could start to fix the economy locally without needing a government handout.

  11. Instructions to all under water home owenrs whom loans are hled by Freddie and Fannie. It is now time to stop payment. Jail the thieves including DeMarco !

  12. Wall Street has DeMarco by the balls. If he allows the reductions, etc. a the securitization sham will be exposed and light bulbs will start going off over eyeone’s head….with the exception of a majority of judges who don’t see a problem with forged and fabricated documents used in order to take a home. Besides if Ed doesn’t play along, the revolving door between DC and Wall Street will be forever closed to him, he’d never get a job in the private financial sector where he can make a million dollars a year. Ed needs to man up and take a page from Neil Barofsky’s book.

  13. I’ve started a “Debt Neutrality” campaign. The goal is help consumers pay down 3 trillion dollars in consumer debt, interest free. If you support this idea, please sign the Debt Neutrality Petition at Change dot org.

    http://www.change.org/petitions/congress-create-debt-neutrality-rights-for-paying-down-credit-cards-student-loans

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