Ed Luce, generally a good columnist, missteps here in this profile of the Ed DeMarco decision on principal reduction. He gets the basics right, that the housing market is a lead weight on the economy that will prevent “escape velocity” and a recovery fast enough to significantly reduce unemployment. He does not get right, or only hints at, how DeMarco fits into all this. To wit:
In the coming weeks, Washington will discover whether Edward DeMarco, acting regulator of the Federal Housing Finance Agency, is susceptible to political pressure. Most Americans have not heard of Mr DeMarco. But millions of homeowners will be affected by what he decides. One way or another, that will also apply to his nominal boss, President Barack Obama.
The problem is that millions of homeowners will not be affected by what he decides. Three-quarters of all underwater mortgages at the GSEs are current: that is, the owners are making their mortgage payments on time. DeMarco’s principal reduction decision would only apply to those homeowners who are seriously delinquent on their mortgage payments.
Nobody in the Administration or the Democratic establishment has pushed for broad debt forgiveness. They segment their policies, with refinancing for those “current” underwater borrowers, and principal reduction for the delinquent. Since Fannie and Freddie are already pursuing refis, that means that DeMarco’s “big decision” would only impact a small universe of borrowers, far less than 1 million, and far less than 10% of the total subset of those underwater.
This is proved by DeMarco’s preoccupation with “strategic modifiers,” those hypothetical folks who would go into default to reap the rewards of a principal reduction. If current borrowers stood to benefit from his decision, there would be no such thing as a strategic modifier.
Luce criticizes Obama for “pulling levers that do not work” in housing policy, but he seems to mean the inability to fire DeMarco, not the cascade of ineffective programs to mitigate the foreclosure crisis. Luce does say that Democrats realized only too late the centrality of housing to the recovery, and that while “the situation has long demanded a bazooka … Mr Obama is offering only a rifle.” That’s true, but he, like every Democrat in office, won’t speak about the implications of his rhetoric – that with the private sector deeply in debt and thus still unable to boost the economy enough, we need broad debt forgiveness to write down mortgages to current value.
To the idea that banks wouldn’t go for this: I give you the fact that banks are worried even about the minor policy that DeMarco may (I think will) endorse:
The banking industry is concerned that Edward DeMarco, the nation’s chief housing regulator, is moving toward a plan that would allow some homeowners to walk away from their mortgages. [...]
“Principal reductions create an incentive for a huge group of borrowers who have continued making their payments, despite lower home prices, to stop paying in hopes of principal forgiveness,” said Frank Keating, the president and chief executive of the American Bankers Association.
Strategic default is a dog that hasn’t barked throughout the foreclosure crisis. You don’t want to do it and take the hit to your credit score, making you ineligible for practically any major purchase for decades. And you don’t want to measure your ability to game the system to mortgage servicers, who may see your default, deny you a modification and raise you an eviction.
Notice that the big banks are relatively silent on all this. It’s really the community bankers and credit unions opposing GSE principal reduction. That’s because the big banks stand to benefit by boosting the value of their second liens, which they wouldn’t have to write off.
In the end, DeMarco’s choice may lead to a bunch of hot air in op-eds, but it’s not going to cause a revolution on housing policy either way. And so we’ll limp along, because protecting and defending banks has taken priority over protecting and defending the homeowner.