Counterparties: Fannie and Freddie’s slow metamorphosis
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Today, FHFA announced that Fannie Mae and Freddie Mac are expected to cost taxpayers $76 billion through 2014, instead of the previous projection of $142 billion. But that may not be enough to save their regulatorâ€™s job. Shahien Nasiripour reports that the Obama administration is pondering a recess appointment to replace Ed DeMarco, who was named the acting director of FHFA in 2009.
DeMarco may be the most reviled bureaucrat in Washington, thanks to his repeated opposition to principal reduction for struggling homeowners. In January, the Treasury Department tripled the incentives for mortgage companies to offer homeowners such reductions; DeMarco promptly refused to consider them, even when internal company reports suggested principal reductions would actually saveÂ Fannie and Freddie money. As Felix wrote in July, DeMarco’s argument against principal reductions was “less financial than moral”, and DeMarco put his government agency in the strange position of vetoing the same governmentâ€™s economic policy.
That wasnâ€™t the first time the agencies have held back efforts to help homeowners. Jesse Eisinger has a fantastic story about how Freddie made it harder for millions of Americans to refinance their mortgages, fearing that it would hurt its profits. Freddie execs worried that the Obama administration’s mass refinancing program — named HARP — would hurt the company’s mortgage portfolio, even as it could help the larger economy:
Freddie Mac produced a memo in the fall of 2011, which was described to ProPublica, estimating that HARP would cause hundreds of millions of dollars in losses. The memo estimated big losses on the portfolio as well as from giving up the rights to return the loans. It minimized the benefits to Freddie’s insurance business from an improved housing market and improved economy. It also minimized the costs to the company of trapping homeowners in mortgages with interest rates so high they would eventually default.
Freddie has since stopped blocking HARP refis, but the missed opportunity was immense. One economist told Eisinger that a larger refi program by Fannie and Freddie could have saved homeowners $75 billion and prevented “hundreds of thousands” of delinquencies and foreclosures. — Ryan McCarthy
On to todayâ€™s links: