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.

Related article:

Underwater homes decrease in California

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.

Related articles:

In principle, Frannie can’t cram either

FHFA finally gives cramdowns merit

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