Progressives have mounted an increasingly intense campaign to pressure Edward DeMarco, acting director of the Federal Housing Finance Agency, to write down the principal on mortgages held by Fannie Mae and Freddie Mac. The FHFA took control of Fannie and Freddie during the 2008 crisis, and DeMarco has since prohibited the two companies from reducing principal amounts of troubled mortgages, citing concerns that it would hurt the Fannie and Freddie bottom lines.
But in a speech at the Brookings Institute today, DeMarco opened the door—a little. “I will not be announcing any conclusions today,” he said, but talked of the potential that “Fannie Mae and Freddie Mac might apply principal forgiveness.” That’s at least not a firm no, which is what DeMarco had previously offered.
It’s important first to flag this as a (small) progressive victory—it’s hard not to draw a line from the Congressional and progressive pressure to today’s speech, in which DeMarco not only doesn’t rule out principal reductions, but speaks forthrightly to the human cost of the housing crisis:
Throughout this crisis each of us know of, or have heard about, many individual stories of homes lost through foreclosure. One cannot help but have sympathy for those who have suffered such misfortune. And surely no one can look at the dislocations in the housing market and not feel frustration at how so many people and institutions failed us, whether through incompetence, indifference, or outright greed or fraud. Yet we are also blessed in this country with people and institutions who care, who are strongly motivated to provide assistance and find solutions. […]
Six years into this housing downturn, the losses persist. The debate continues about how we as a society are going to allocate the losses that remain. Asking hard questions in this debate does not make one unfeeling about the personal plight this situation has created for so many. Indeed, the majority of those most hurt by this housing crisis did nothing wrong – they were playing by the rules but they have been the victims of timing or circumstance or poor judgment.
DeMarco’s potential shift here is based on a FHFA study of how updates to Treasury’s HAMP program might help the agency write down severely troubled mortgages—an analysis that found FHFA could realize $1.7 billion in savings by forgiving principal on some loans.
The agency examined a pool of 700,000 mortgages, on which Fannie and Freddie would lose an estimated $63.7 billion if they were not modified. The analysis looks at the recently tripled incentives under HAMP for principal write-downs, and finds that the losses would be $53.7 billion if some principal were forgiven, while the losses would be $55.7 billion if those loans were granted forbearance—this means some principal isn’t reduced, but taken off temporarily until payments can be made. This is the method DeMarco has heretofore preferred, but this analysis shows it might be more costly than principal reduction—and this is significant. After factoring in the money sent over from Treasury and the people who may redefault, the analysis found $1.7 billion in savings for FHFA under principal reduction.
DeMarco is focusing on, at most, 1 million homeowners, which is but a small slice of the troubled mortgages held by Fannie and Freddie—they have about 60 percent of the market. Why such a small segment? That’s what some Democrats already want to know.