Just let housing regulator DeMarco do his job

March 8, 2012

By Agnes T. Crane and Daniel Indiviglio
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

The knives are coming out for Edward DeMarco. The acting director of the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, has been coming under increasing attack recently from Democratic lawmakers as well as housing lobby groups. His crime: he won’t cut principal on underwater home loans backed by Fannie and Freddie. But his critics should cut him some slack.

Principal reduction can have a role to play in helping out underwater homeowners. There is, after all, some $700 billion of negative equity in U.S. housing, according to CoreLogic. Providing some relief on the amount a borrower owes could make the difference between keeping up payments and lurching into default. DeMarco’s critics argue that such a strategy should be a no-brainer for such loans held by Fannie and Freddie. They argue that since taxpayers are already on the hook for mortgages guaranteed by the government, it’s better to take a modest hit to prevent a much bigger loss should a mortgage default.

But this contention ignores an important rejoinder from DeMarco: other modification strategies such as repayment holidays and lower interest payments work nearly as well without forcing Fannie and Freddie to take a hit on the loan amount – that only happens if modifying a mortgage isn’t enough to prevent a borrower from defaulting.

And the vast majority of underwater loans – where the value of the house is less than the amount of the outstanding mortgage loan – do not end up in default. As of June last year, according to DeMarco, 80 percent of Frannie borrowers with negative equity in their homes whose loans were backed by the agencies were current on their mortgages. Blanket principal reductions would cause losses on all of them.

Critics are also ignoring DeMarco’s mandate to minimize losses from bailing out the two mortgage agencies. By attacking him, they are trying to force him to put struggling homeowners’ needs ahead of all taxpayers.

Moreover, DeMarco is one of the few who is at least proposing ways to fix America’s housing finance system, including how to shutter Fannie and Freddie. Most lawmakers, meanwhile, seem happy to keep deferring any such reforms. DeMarco’s stance as a clear-eyed regulator deserves praise, not punishment.

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DeMarco is wrong to assume that most underwater loans will not end up in default, just because they haven’t yet. My loan is guaranteed by Freddie Mac, I have two empty homes next door, I have never made a late payment… but eventually I MUST stop paying.

My wife and I sold our modern, multi-level home six years ago when our youngest moved away to college and we bought a small 1960’s rambler for 210K. We put 50K down. We intended to live in the rambler for about 10 years. Our two dogs would die of old age right around the time we were ready to retire and right around the time we would no longer be able to take care of our 1 acre property. We would sell then to recover our 50K, collect any profit that we earned after making 10 years of payments and improvements and move to a condo with underground parking.

One of the ramblers next door started out on the market at 79K and just got marked down to 58K. I still think I could sell my place for 80K, but I could be wrong about that.

At some point soon, I will be forced to walk away because selling my home won’t generate 160K to pay off the mortgage… and I’m getting old. I cut up three large tree stumps yesterday and I can really feel it today.

Minnesota is a non-recourse state so when I finally stop making payments, the lender cannot pursue me for the difference between what I still owe on my mortgage and the paltry amount they will get when the re-sell my house.

However, non-recourse laws only apply to mortgages that were taken out on the original date of purchase, not to refinanced mortgages. If I would have accepted Freddie Mac’s offer coordinated through CitiMortgage to reduce my interest rate by 2%, my non-recourse status would have changed and CitiMortgage could have come after me for the 80K difference between what they would get when they sell my house and what I still owe on the mortgage. I will NEVER refinance without a principal reduction.

I’m mad as hell about what has happened to my property value. As a taxpayer, I helped bail out all the corporations that caused this problem. I have incurred large personal financial losses caused in large part by CitiMortgage and Freddie Mac’s participation in the vast real estate/mortgage fraud. CitiMortgage didn’t even have the courtesy to inform me that I would lose my non-recourse status if I accepted their “generous” offer.

In fact, the ONLY thing that DeMarco can do to prevent my eventual default is to give me principal reduction to my home’s current fair market value.

Even with a principal reduction, I will never get my 50K back when I finally sell my house. I would only break even on the new mortgage balance. If I am allowed to break even, I could keep my credit intact, perhaps purchase a small condo rather than rent one.

I might be a fool for continuing to make such large payments on a property worth less than half of what it was once worth, but I’m not going to reward Freddie Mac and CitiMortgage for the harm they have done to my property value and my retirement plans by paying off my original mortgage balance with a check for 160K when I sell my house for 80K.

DeMarco is dead wrong about that. The property value is gone. There are losses to be taken.

I will be taking more than 50K in losses, whether DeMarco gives me a principal reduction… or not. Freddie Mac will also take 80K in losses whether DeMarco gives me a principal reduction… or not.

With a principal reduction, the property won’t sit empty, I will continue to take excellent care of the property until I sell and I will still have a good credit rating so I can participate more fully in our nation’s economic regrowth.

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