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Tom Lawler, the housing economist and former chief economist at Fannie Mae, has a commentary up that calls into serious question that NPR/Pro Publica story about how Fannie and Freddie have some secret new analysis showing that principal reductions would be not only cost-effective for the GSEs, but cost-effective to the taxpayer.
Let me say up front that I believe, based on all the analysis I have read, that principal reductions would be long-run positive over foreclosures in cases where the borrower has an ability to pay. But that’s not quite the issue here. The issue is that NPR and Pro Publica are claiming that some secret analysis exists where even Fannie and Freddie believe this. That puts the onus squarely on Ed DeMarco, and makes him more of a villain holding back the housing rebound.
Lawler takes issue with one part of the NPR/Pro Publica story, the part which claims that “loan forgiveness wouldn’t just help hundreds of thousands of families (stay) in their homes,” but that also “it would help taxpayers” by saving Freddie and Fannie money. That’s not true, Lawler says, because the only way principal reductions end up saving Freddie and Fannie money is through the recently super-sized HAMP incentives for principal reductions going to them. And of course, those incentive payments, routed through TARP, come from taxpayers.
But Lawler reveals a bit too much here. Check it out:
Other reports, including an interview with Freddie’s CEO, indicate that the GSEs’ analysis finds that principal reductions would be “cost effective” for the GSEs ONLY after factoring in the new, turbo-charged incentives Treasury would pay to the GSEs (and other lenders/investors) for doing a principal reduction under HAMP [...]
So here’s the “taxpayer” scoop: as best as I can tell, the GSEs’ analysis (which, to be fair, some have questioned) suggests that principal reductions would NOT make sense for them (or, implicitly, for taxpayers) without any Treasury/taxpayer incentive payments. However, IF the GSEs receive hefty incentive payments from Treasury/taxpayers to engage in principal reductions, then in some cases doing so WOULD make sense to the GSEs – but NOT to taxpayers!
Unless I miss my guess, Lawler, who as former chief economist for Fannie is in a position to know, just blew up the NPR/Pro Publica story. Because he’s saying here that the GSE analysis thus far does not support principal reductions. That’s a direct contradiction to the NPR/Pro Publica story. Their story is based on some new, secret analysis, which Lawler implies doesn’t exist. This is the story I’ve heard as well – NPR and Pro Publica based their claim of “new analysis” on some informal document.
In fact, Lawler catches this Housing Wire article with Freddie Mac’s CEO saying on Friday – the same day as the NPR/Pro Publica “secret analysis” piece came out – that the agency would have to do some new analysis:
“I have to say recently the Treasury sweetened the program and tremendously increased the incentive payments in their offer to us,” Freddie Mac CEO Charles “Ed” Haldeman said at HousingWire’s REThink Symposium. “We will reevaluate that to see what may be in our economic best interest. If there are very large incentive payments — which could be 50% of what you could write down — it may be in our economic self-interest to participate in that.”
“Will re-evaluate” – i.e. there is no evaluation yet, but we’ll do it in the future.
Now, I hope they do re-evaluate. The HAMP incentive payments are supposed to go indirectly to homeowners in the form of encouraging loan mods, including principal write-downs. If that tips Fannie and Freddie into the write-down column, great. They’ll still have to figure out the second lien issue, but they could start on clear first liens with no second. It would help people. Yves Smith has lots more on all of these issues which I’ve been hashing out over the past two days.
But the important thing here is that Lawler’s admissions suggest that the NPR/Pro Publica article is bullshit. And to be sure, that’s what has prompted this new round of condemnation against Ed DeMarco. Only it’s made up. There’s a full-court press to use whatever means necessary – true or not – to vilify DeMarco and ignore the terrible housing policy from the rest of the Administration. And NPR and Pro Publica are at the head of it.
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About FDL News Desk
We’re always happy when our stories inspire debate and comment, but we respectfully disagree with you.
We reported that both Freddie Mac and Fannie Mae have, in recent weeks, presented analyses to the Federal Housing Finance Agency that show that principal write-downs would in many cases reduce losses for the Frannies and thus be good for their bottom lines. We never said these analyses were “secret.” These were internal reports. They hadn’t been reported on prior to our story. We were also clear that these analyses were done following the policy decision by the Obama administration to triple the incentives for principal write-downs through its HAMP program and that those incentives would now be offered to the GSEs as well.
We wrote, “The new analyses by Freddie and Fannie were done to assess the new financial incentives that the Obama administration announced in late January. ProPublica and NPR have not read the analyses, but two people described key aspects of them. The companies now find that reducing principal on troubled mortgages has a ‘positive net present value’ — in other words, that doing it would bring in more money for the companies over the life of the loans than not doing it.”
Housing economist Tom Lawler raises an interesting point: If these principal write-downs are only financially attractive for Fannie and Freddie because of government subsidies, then isn’t this just moving taxpayer money from the left pocket to the right pocket?
This question doesn’t undermine the news: that, to repeat, Fannie and Freddie presented these analyses to the FHFA.
As for the benefit to taxpayers, we stated that saving Fannie and Freddie money saves taxpayers money in the context of the government bailout. “Such loan forgiveness wouldn’t just help keep hundreds of thousands of families in their homes, it would also save Freddie and Fannie money. That, in turn, would help taxpayers, who bailed out the companies at a cost of more than $150 billion and are still on the hook for future losses,” we wrote.
The HAMP money (from the Troubled Asset Relief Program (TARP)) has already been allocated to be spent on housing. The Obama administration isn’t spending new taxpayer money. Sure, the Obama administration could decide to not spend this already-allocated money. But it has made a policy decision to do so.
Will this be money well spent? Will tripling the subsidy in HAMP for write-downs be a net gain or a net loss for taxpayers? The argument from proponents is that such write-downs would not just benefit the recipients, but would benefit the housing market, which in turn would benefit the economy. If that’s true, then taxpayers would benefit from this program.
Either way, it’s news that Fannie and Freddie now believe principal modifications will save them money, which is why we ran the story.
ProPublica and NPR don’t have a position on principal write-downs or on who should lead the FHFA.
We will continue to report on this story. Please feel free to reach out to us anytime if you would like to talk further.
-Jesse Eisinger, ProPublica and Chris Arnold, NPR