Do you think it’s time for a change in leadership at the FHFA?
- Yes: Fire DeMarco! (73%, 30 Votes)
- No: DeMarco is doing a good job. (27%, 11 Votes)
Total Voters: 41
Attorneys general from nine states — including California’s own Kamala Harris — have called for the replacement of the Federal Housing Finance Agency’s (FHFA’s) acting director, Edward DeMarco. The FHFA dictates the actions of Fannie Mae and Freddie Mac (Frannie).
Why oust DeMarco? They primarily cite his refusal to cram down principal balances to fair market value (FMV). The attorneys general argue that DeMarco’s refusal hurts the FHFA’s portfolio as well as those homeowners with underwater mortgages guaranteed by Frannie.
first tuesday insight
We agree with the attorneys general as our readers well know: cramdowns are essential for California’s 2,000,000 underwater homeowners (most of which have mortgages guaranteed by Frannie) and California’s economic recovery.
Although home prices in California have increased from 9% to 16% on different tiers of home prices over the past year, it is well documented that this is a short-lived spike spurred by speculators. After the speculators wise-up and jump ship — they probably have another six months to go — negative equity homeowners will be no closer to solvency than they were in 2011.
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DeMarco has refused time and again to allow Frannie to grant cramdowns, despite the fact that FHFA-commissioned studies provide definitive evidence of the widespread benefits of cramdowns. So why won’t DeMarco have it? The so-called moral hazard — the ingrained mantra of theologically inclined mortgage lenders — is too great.
This is Demarco’s tortured reasoning: if some distressed homeowners are given principal reductions, then financially capable homeowners will pile on the principal reduction band wagon. This mass migration of opportunistic homeowners will plummet Frannie into bankruptcy, says DeMarco.
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Well, dear reader, the notion of moral hazard is nonsense. Last we checked, the FHFA is not granted the power to determine what is right and wrong. The only thing to be done is to decide whether or not cramdowns make economic sense. This is a matter of mathematics and economics, not morality. There’s no such thing as piety in a business arrangement.
DeMarco has made clear that he is an unwilling ideologue, firmly entrenched in his austerian opposition to cramdowns. He clearly has the interest of large lenders in mind far above that of homeowners upon whom he intentionally inflicts pain for lender gain. And these homeowners are the ones who will drive this recovery — not Big Banks or lenders, not even suppressed government balance sheets in these times.
We say, off with his head! Nine attorneys general agree. What do you think?
Re: Attorneys general call for DeMarco’s replacement from HousingWire
If both my neighbor and myself are underwater, neither of us can get our mortgages reduced by cramdown. But If I buy his home and he buys mine, we can get two short sales. Isn’t the economic result for everyone materially the same as two cramdowns? Of course I realize the likely credit report barriers to actually doing this. In a macro sense, cramdowns are everywhere masquerading as short sales.
While cramdowns seem like a solution to rescue borrowers I don’t like the precedent it would set. The primary reason for the housing crash, greed, was a result of investors not borrowers. Sorry, Sabina, but those of us who purchased homes in 2004-2005 did so in good faith not because we were irresponsible. We purchased homes that we wanted to own and now are stuck with homes that aren’t worth what we paid for them. The distressed market and underwater home owners are fueling some of the stress of low inventory in the market but only because most of us can’t/don’t want to sell at a loss. Over time, the values of these distressed properties will rise and then how will you reconcil the equity forgiven borrowers will realize?
You really missed the mark on this one. If cram down is allowed, Lenders will pull way back. Private money lenders will be gone. I don’t think we should have granted tax relief for debt forgiveness. Borrowers should be held responsible for their debts.
Cramdowns are wrong, because they reward irresponsible behavior. The underwater crisis is selfinflicted by the borrowers!
Cramdowns are unfair for those who pay their bills. It is unfair to taxpayers. This is the usual marxist drivel coming from First Tuesday recently! Talking about contracts not being honored, I’m sure you would never want the contracts of your union buddies, the public servants, who are bankrupting the country being ripped up! Now that would be areal boon to the economy!
Though the cramdown seems like an easy solution to help underwater owners, the opportunity for abuse and great inequities is immense. And, the back lash from lenders recognizing that the largest loan buyer in the world is capable of undoing much of the principal and security of their loans can only cause a justified meaningful increase in rates to reflect a significant new risk. The better solution would be a means of modifying the underwater portion to delay payment of principal (and possibly defer interest) on that portion until sale of the property or the restoration of its value over time. If it is soon sold, that gives the lender what it would have had in a short sale. If much down the road, the homeowner takes care of the property, pays less on the loan and the borrower and lender are in the position of having a reverse mortgage situation.
Maybe it’s just me, but people don’t seen to realize the true ramifications of allowing for Principle write downs. Think for a moment the outrage if only a few (unworthy), homeowners get chosen. Will never work, unless every mortgage or not get the same benefit. What about the Banks/Lenders balance sheet? A nightmare to say the least.
If demarco’s property was affected cramdown policies would be enforced.