A major issue in the foreclosure crisis right now is the way in which individual actors are pursuing their own selfish short-term goals rather than what would be best for the greater economy, and ultimately, their own businesses. The loan servicers would rather foreclose, when they work for investors who would prefer at least getting half a loaf through loan modifications. Similarly, the FHFA (Federal Housing Finance Administration), which oversees Fannie and Freddie, has rejected a government-administered principal modification program, because their mission is to minimize losses to the taxpayer in the short-term, and mods would reduce the overall portfolio value. But houses in foreclosure do nothing for Fannie and Freddie’s bottom line, either. FHFA is also seeking put-backs on mortgages on the banks, also to reduce taxpayer exposure, but we see with their rejection of principal mods that the sword is double-edged.
It is in this context that 54 House Democrats led by Rep. Brad Miller (D-NC) have in a letterurged the acting director of FHFA, Ed DeMarco, to modify principal for troubled and underwater borrowers. Ultimately, such a strategy would lower taxpayer losses, not increase them.
FHFA’s opposition to modifying the enterprises’ mortgages by reducing principal is greatly increasing taxpayer losses, however. Foreclosures result in a loss of 70 percent or more on the mortgage, and claims against homeowners for the difference, even in jurisdictions that allow such claims, are usually worthless. Sustainable mortgage modifications that avoid foreclosure will almost always reduce the loss to the enterprises.
Basically, by refusing to modify principal, traditionally the most sustainable modification, FHFA is setting off a death spiral, where home values continue to drop because of foreclosures, and borrowers go more underwater, leading to more foreclosures. With Fannie and Freddie holding so many mortgages, they are a serious impediment to a more stable solution to the foreclosure crisis. This is separate and apart from the fraud rampant in the system and the proposed global settlement, which could have some mandates for servicers on principal reductions, as well as changes to how they do business. But as the letter says, if FHFA rejects modifications even after the global settlement, servicers will fill their mod quotas with their loans outside FHFA’s purview. Meaning that the taxpayer will still take a lot of the losses from the system.
This is all about allocating who takes the losses. FHFA doesn’t want them on Fannie and Freddie in the short term, even though it would benefit them down the road. So taxpayers, as a result, take a bath.
A list of the signatories to this letter is below. As you will see, it’s basically every high-level Democrat in the House.
Rep Brad Miller (NC), Rep George Miller (CA), Rep Barney Frank (MA), Rep John Conyers (MI), Rep Elijah Cummings (MD), Rep John Sarbanes (MA), Rep Robert Andrews (NJ), Rep Keith Ellison (MN), Rep Bobby Rush (IL), Rep Jan Schakowsky (IL), Rep Alcee Hastings (FL), Rep Ted Deutch (FL), Rep Jackie Speier (CA), Rep Maxine Waters (CA), Rep Betty Sutton (OH), Rep Raul Grijalva (AZ), Rep John Tierney (MA), Rep Barbara Lee (CA), Rep Susan Davis (CA), Rep Howard Berman (CA), Rep Linda Sanchez (CA), Rep Maurice Hinchey (NY), Rep Bob Filner (CA), Rep Xavier Becerra (CA), Rep Jim McDermott (WA), Rep Doris Matsui (CA), Rep Anna Eshoo (CA), Rep Lynn Woolsey (CA), Rep Lois Capps (CA), Rep Edolphus Towns (NY), Rep James Moran (VA), Rep Shelley Berkley (NV), Rep Sander Levin (MI) Rep Luis Gutierrez (IL), Rep Al Green (TX), Rep Eddie Bernice Johnson (TX), Rep Gary Ackerman (NY), Rep Earl Blumenauer (OR), Rep Jim Langevin (RI), Rep Mike Honda (CA), Rep Pete Stark (CA), Rep Zoe Lofgren (CA), Rep Sam Farr (CA), Rep Terri Sewell (AL), David Cicilline (RI), Rep Jerry McNerney (CA), Rep John Yarmuth (KY), Joe Baca (CA), Rep Karen Bass (CA), Rep Frederica Wilson (FL), Rep Eleanor Holmes Norton (DC), Rep Debbie Wasserman Schultz (FL)