Federal Housing Finance Agency director Edward DeMarco has been facing significant pressure from progressives to allow Fannie Mae and Freddie Mac — the mortgage giants that the FHFA regulates — to reduce outstanding mortgage principal for troubled homeowners. This pressure only intensified following last week’s ProPublica story showing that principal reductions would save taxpayers money in the long run, undercutting a key argument DeMarco was using to block action.
In an interview with the Financial Times, Edward DeMarco, acting Federal Housing Finance Agency director, said policy makers who are pushing his agency to allow Fannie Mae and Freddie Mac to reduce borrowers’ mortgage balances, are deliberately shielding big banks from taking losses on distressed housing debt. […]
Now, as the Obama administration, Congress and at the Federal Reserve call on Fannie Mae and Freddie Mac to write down the mortgages they own or guarantee, Mr DeMarco argues that such a move amounts to a transfer of US taxpayer wealth to the biggest US lenders, whose “second mortgages” are subordinate to the debt owned or guaranteed by Fannie Mae and Freddie Mac.
“If you do principal forgiveness, who is it benefiting?” Mr DeMarco asked. “Doing principal forgiveness is what would protect the big banks.”
DeMarco and Morgensen both point to people with “second liens” — second mortgages — on their homes as the hurdle to reducing principal. And yes, if principal were reduced on a loan with a second mortgage and the second mortgage were left entirely intact, a big bank could certainly profit.
But as Center for Economic and Policy Research Director Dean Baker noted, most loans held by Fannie and Freddie don’t have a second liens. So for those homeowners, this problem simply doesn’t exist and the rationale DeMarco is using for not helping them vanishes. And bank regulators have it in their power to fix the second lien problem too, if they so chose, rendering the entire argument moot.
As Reuters’ Felix Salmon added, if principal reductions would actually bail out banks, “then the largest banks would surely be pushing loudly for their implementation. But they’re not. Because the principle beneficiaries of principal reductions are not banks, but rather homeowners.” DeMarco is quickly running out of excuses for failing to provide aid to homeowners and it’s a shame that Morgensen aided him in his snow job.