Tuesday, August 7, 2012

Housing Help is Not On The Way

One of the last hopes of a large scale project that would improve people's lives and the economy without the help of congress was using Freddie and Fannie to perform principle reductions on people's mortgages.

That hope died last week when the Director of FHFA, Ed DeMarco, announced his refusal to do so. David Dayen:
The important part is actually what Dylan Matthews notes in passing AFTER this, that Levitin said “replacing him means Obama can’t blame DeMarco for the state of the housing sector.” This is quite right, and you can see it something I tweeted yesterday. James Lockhart left FHFA, making Ed DeMarco acting director, in August of 2009, three years ago. In the total time he has been acting director, there has been a Presidential nominee for the position for roughly two months. The Administration didn’t get around to nominating Joseph Smith – the banking commissioner of North Carolina and currently the enforcement monitor for the foreclosure fraud settlement – until November 2010, during the lame duck session. Smith was denied an up or down vote in the lame duck and he withdrew his name from consideration in January 2011. And that’s been it. There has never been a replacement nominee for FHFA Director since.

The President and the Treasury Department claim that principal reduction and refinancing are priorities (now, after three years of doing nothing toward that purpose; the HAMP principal reduction program did nothing until the incentives got tweaked this year). They claim that they strongly object to DeMarco’s position. They have rallied a large section of the housing advocacy community around to focusing attention on DeMarco, a virtual unknown just a few months ago. DeMarco, in fact, is very useful to the Administration right now. He’s an excellent foil, a means to distract attention away from the terrible housing policies of the past few years. Suddenly it’s Ed DeMarco’s fault that housing hasn’t improved. It’s Ed DeMarco’s fault that you can buy a house for the price of a Lexus in 10 cities in America. DeMarco as cartoon villain puts the guys who have been running housing policy for the last three-plus years in the white hats.

That’s been sold brilliantly, and a recess appointment would mean that Obama would have to take ownership of the policy. There’s a chance that could actually fail. And so, for three years, there’s been a named nominee for two months. This is working out nicely for the Administration.

This is not to say that DeMarco is somehow right. I think Jared Bernstein’s analysis of DeMarco’s flawed analysis is spot-on. And DeMarco re-imagining himself as the executor of all taxpayer funds – by rejecting the cost savings for principal reduction by saying it just moves money from Treasury to the GSEs, as if he has any say over how tax dollars are spent at Treasury – is a breach of jurisdiction and simply a dodge to force an ideological rejection of principal reduction. Will DeMarco stop facilitating home purchases in the suburbs because suburban sprawl forces more hydrocarbon use, leading to increased taxpayer dollars for the Defense Department to secure oil supplies? The whole thing is ridiculous.

But DeMarco knows he won’t be fired. He’s become the symbol in the story, and the Administration is much more interested in symbolism when it comes to housing.
And now, Bailout author Neil Barofsky, someone who actually worked through this whole process with the Treasury department, has also given his take:
Last week the acting director of the Federal Housing Finance Agency, Ed DeMarco, made a familiar argument. He announced that he would not approve the Obama administration’s request that struggling borrowers whose mortgages are backed by Fannie Mae and Freddie Mac receive debt relief through principal reductions subsidized by the Troubled Asset Relief Program (TARP). DeMarco’s refusal was based on his concern that granting such relief would encourage other borrowers to “strategically default” by not making payments on their loan to take advantage of the promise of a reduction in their debt. This is a version of the moral hazard argument we heard about so often in the early days of the financial crisis. Secretary Geithner, in response, argued in a public letter that notwithstanding such concerns, and for the greater good of the overall economy, such relief should be granted whenever it would result in a better economic outcome than foreclosure.

This is not the first time this debate is happening – but last time around, Geithner was the one arguing DeMarco’s points. Although one can argue whether principal reductions are the right way to address the ongoing housing slump – I have championed principal reductions for years but acknowledge that there are passionate arguments on both sides of the issue – no one should be fooled that the administration’s entreaties to DeMarco are anything but political posturing. As I recount in my recently released book, Bailout, during my time as the special inspector general in charge of oversight of the TARP bailouts, Treasury Secretary Timothy Geithner, using the same justifications now offered by DeMarco, consistently blocked efforts to use TARP funds already designated for homeowner relief through a principal reduction program that could have a meaningful impact on the overall economy.

For example, in 2009, $50 billion in TARP funds had been committed to help homeowners through the Home Affordable Modification Program (HAMP), a program that the president announced was intended to help up to 4 million struggling families stay in their homes through sustainable mortgage modifications. Hundreds of billions more were still available and could have been used by the White House and the Treasury Department to help support a massive reduction in mortgage debt. But Geithner avoided this path to a housing recovery, explaining that he believed it would be “dramatically more expensive for the American taxpayer, harder to justify, [and] create much greater risk of unfairness.” Treasury amplified that argument in 2010, after it reluctantly instituted a weak principal reduction program in response to overwhelming congressional pressure. That program incongruously left it to the largely bank-owned mortgage servicers (and to Fannie and Freddie) to determine if such relief would be implemented. In response to our criticism that the conflicts of interest baked into the program would render it ineffective unless principal reduction was made mandatory (when in the best interests of the holder of the loan), Treasury reinforced Geithner’s early statements, refusing to do so primarily because of fears of a lurking danger: the ”moral hazard of strategic default.” The message was clear: No way, no how would Treasury require principal reduction, even when Treasury’s analysis indicated it would be in the best interest of the owner, investor or guarantor of the mortgage.

Indeed, at every critical juncture at which Treasury could have unilaterally implemented meaningful principal reduction, the same argument now presented by DeMarco was hauled out as an excuse for inaction.
I want to believe the best intentions of the administration, and if they've had a real change of heart over the importance of principled reductions, but it really would fly in the face of everything we've seen on housing policy in the Obama Administration.

The fact that every left leaning advocacy group simultaneously sent me some campaign action against Ed DeMarco is what sent my bullshit detectors into high gear. Focusing on DeMarco does nothing other than divert our attention from the people who have presided over our abysmal housing policy the past three years.   Wish it was something else, but that's really the only way I can see it at this point.

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