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

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