Wonkbook: Principal reductions are nixed again

August 1, 2012

Karl Singer is writing Wonkbook this week while Ezra is on vacation.

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Top story: Principal reductions are nixed again

FHFA head Ed DeMarco won't let Fannie and Freddie do principal reductions. "The independent federal agency that administers Fannie Mae and Freddie Mac said on Tuesday that it would not let the mortgage companies offer debt forgiveness to borrowers, again rejecting the entreaties of the Obama administration. The Federal Housing Finance Agency said it had concluded after months of study that up to half a million homeowners could benefit from such a program, and that taxpayers might save $1 billion because aid recipients would be more likely to continue making mortgage payments. But the agency’s acting director, Edward J. DeMarco, said the benefits most likely would be much smaller -- too small in his judgment to offset potential costs, including the risk that some borrowers would stop making payments in pursuit of a better deal. Offering debt forgiveness 'would not make a meaningful improvement in reducing foreclosures in a cost-effective way for taxpayers,' Mr. DeMarco said in a statement Tuesday." Binyamin Appelbaum in The New York Times.

READ: DeMarco's statement.

@BCAppelbaum: The key point: DeMarco completely rejects the WH argument that shifting costs to TARP means he needn't care about those costs.

Geithner will continue to push for principal reduction. "U.S. Treasury Secretary Timothy F. Geithner, twice rebuffed, is vowing to try a third time to persuade the Federal Housing Finance Agency to allow principal forgiveness on mortgages backed by Fannie Mae (FNMA) and Freddie Mac. (FMCC) 'I urge you to reconsider this decision,' Geithner wrote to FHFA Acting Director Edward J. DeMarco, who yesterday announced that Treasury Department financial incentives would not be enough to make it financially worthwhile for the two taxpayer-owned companies to write down debt on troubled loans. DeMarco’s decision came three months after an April speech in which he signaled that he believed the technique would not work and could encourage additional defaults. Geithner yesterday offered technical assistance should DeMarco change his mind. 'Treasury stands ready to provide any additional analytical support to make a targeted principal reduction program at the GSEs successful,' he wrote to DeMarco." Clea Benson in Bloomberg.

READ: Geithner's letter to DeMarco.

@goldfarb: Fury at FHFA may be justified, but worth noting that Obama was resistant to big payments for principal reduction 'til this year.

DeMarco has the power to help the economy. "DeMarco just rejected the HAMP plan, but the refinancing plan would be a more dramatic, and effective, move. The key to that plan is the fact that the vast majority of mortgages backed by Fannie and Freddie are paying interest rates above 5 percent, well above current interest rates of about 4 percent. If the mortgages were refinanced, that’s a substantial amount of money that each of the 30 million families with Fannie or Freddie mortgages would save on their payments every month. Hubbard estimates (pdf) that the average borrower would save $2,800, and that the total savings would come to $70 billion. It would function, effectively, like a $70 billion tax cut, albeit one that actually makes Fannie and Freddie money. Most studies suggest that tax cuts have a stimulative multiplier, meaning the economy would grow by more than $70 billion." Dylan Matthews in The Washington Post.

Yes, Barack Obama can replace Ed DeMarco. "Adam Levitin, a professor at Georgetown University Law Center who is an expert on housing finance law, informs me that this worry is misplaced. Obama may not be able to fire DeMarco, but he sure can replace him. Here’s Levitin: 'The FHFA statute provides that the FHFA Director is only removable 'for cause'. 12 U.S. Code sec. 4512. That sort of provision usually means that the President can only remove the officer for malfeasance or misconduct, not just a policy disagreement. (See In re Humphrey’s Executor.) .DeMarco, however, is an Acting Director…This means he can be removed at any time simply by the Presidential appointment of a Director. That would require Senate confirmation (not happening before 2013 under political realities and the ridiculous Strom Thurmond rule) or a recess appointment (possible).'..Obama could have a new FHFA director whenever he wants one." Dylan Matthews in The Washington Post.

@ddayen: There has been a replacement nominee for FHFA Director for about 2 months in the 3 years that Ed DeMarco has held the acting director spot

KRUGMAN: DeMarco has got to go. "DeMarco’s basis for the rejection was that this forgiveness would represent a net loss to taxpayers, even if his agency came out ahead. That’s a very arguable point even on its own terms, because the paper he cited (pdf) in support of his stance took no account of the positive effects on the economy of debt relief -- even though those effects are the main reason for offering such relief. Since a reduction in debt burdens would strengthen the economy, this would mean greater revenue -- and this might well offset any losses from the debt forgiveness itself...There is simply no way that it makes sense for an agency director to use his position to block implementation of the president’s economic policy, not because it would hurt his agency’s operations, but simply because he disagrees with that policy." Paul Krugman in The New York Times.

SOLMON: Debt relief is unlikely to lead to a wave of structural defaults. "Even absent shared appreciation, debt relief is unlikely to prompt a wave of structural defaults. First, the program requires eligibility tests, including demonstrated financial hardship. Second, anyone who deliberately defaults takes a huge risk in damaging their credit. Third, default doesn't guarantee debt forgiveness or any type of loan modification. Fannie and Freddie would have been required to use what's known as a Net Present Value model, which compares the financial benefit from a loan that's modified with one that's not. A loan that's NPV 'positive' is considered a good candidate for modification, since it will improve cash flow for the investor in the loan. Such a test generally eliminates borrowers who aren't in danger of foreclosure or who have positive equity in their homes, since the lien-holder is unlikely to suffer losses if the loan isn't modified." Deborah Solomon in Bloomberg.

SALMON: Even the supposed downsides to principal reduction aren't that bad. "The weirdest thing about this argument is that the horribles aren’t particularly horrible. Higher mortgage rates? Um, fine: no one is exactly complaining that mortgage rates are too high right now. A constriction in mortgage credit lending? That’s fine too: it was too-lax credit lending that caused this whole problem in the first place. Both together? Even that’s fine: it would help bring homeownership rates down from their current too-high levels, and encourage more people to rent rather than own, creating a more flexible national labor force." Felix Salmon in Reuters.

@ddayen: Hilariously, FHFA announced a separate initiative with Treasury to streamline short sales, which of course are a form of principal reduction

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Top op-eds

1) DELONG: The long-term unemployed will become an enormous problem. "At first, the long-term unemployed in the Great Depression searched eagerly and diligently for alternative sources of work. But, after six months or so passed without successful reemployment, they tended to become discouraged and distraught. After 12 months of continuous unemployment, the typical unemployed worker still searched for a job, but in a desultory fashion, without much hope. And, after two years of unemployment, the worker, accurately expecting to be at the end of every hiring queue, had lost hope and, for all practical purposes, left the labor market...I have been arguing for four years that our business-cycle problems call for more aggressively expansionary monetary and fiscal policies, and that our biggest problems would quickly melt away were such policies to be adopted. That is still true. But, over the next two years, barring a sudden and unexpected interruption of current trends, it will become less true." J. Bradford DeLong in Project Syndicate.

2) RATTNER: Big banks should be regulated, not split up. "The bank merger frenzy that Mr. Weill set off in the late 1990s was not the proximate cause of the financial crisis. Nor was the concentration of our banking system, which is less centralized than those in Britain, France, Germany, Italy, Japan, Switzerland and many other countries. What brought our financial system to its knees was old-fashioned poor management that expanded the banks’ portfolios and activities too aggressively without sufficiently robust risk controls, enabled by lax (or nonexistent) oversight by regulators...We need a Dodd-Frank do-over to create the right oversight apparatus for huge banks. Regulators will always be outnumbered by bankers, and they will never find every problem. But, like prison guards, regulators are essential, even if they are outnumbered." Steven Rattner in The New York Times.

3) YGLESIAS: It's time to privatize the Postal Service. "Postal Service’s underlying financial model is broken, and it probably can’t be fixed without radical measures...The problem is that the monopoly isn’t nearly as lucrative as it used to be--and barring some wild technological shift, it’s going to keep getting less and less lucrative. That means that administrative fixes related to Saturday delivery or various schemes to more aggressively lay off workers or cut their pay will only kick the can down the road. Sooner or later the basic model will need a more thorough rethink...Privatization--also practiced successfully in many European countries--could make a lot of sense." Matthew Yglesias in Slate.

4) DOWNEY: Congress should repeal federal deposit insurance. "Federal deposit insurance was enacted in the 1930s to prevent runs on banks by giving nervous depositors confidence that Uncle Sam would protect their money. But Congress was not about to let federally insured commercial banks trade, underwrite and speculate in securities or commodities. That's why the Glass-Steagall Act, which created federal deposit insurance, also separated commercial and investment banking. Congress repealed the provisions of Glass-Steagall separating commercial banks and investment banks in 1999. Unfortunately, the government remained in the business of insuring bank deposits...Instead of retaining federal deposit insurance, Congress should have permitted the market to create a system of private guarantors of bank deposits. It would have been consistent and intellectually honest to repeal both sections of Glass-Steagall: federal deposit insurance as well as the separation of investment and commercial banking." Robert Downey in The Wall Street Journal.

5) DAVIDSON: Pent-up demand for cars could help boost the recovery. "New-car sales, which collapsed to less than 11 million in 2009, are expected to surpass 14 million this year. And forecasters believe that they will increase by around a million annually for the next couple of years. In 2015, we could eclipse 16 million vehicles sold, which is near the precrisis peak. The industry’s buoyancy comes largely from pent-up demand. Many Americans are driving really, really old cars...If the auto industry believes 2015 will be better, it will invest in bigger plants, hire more employees, place bigger orders with its suppliers and do countless other things that can push a recovery along. Other industries, like retail or housing, might react to these newly hired autoworkers and invest accordingly." Adam Davidson in The New York Times.

Minnesota indie rock interlude: Cloud Cult plays "There's So Much Energy In Us" live on KEXP.

Got tips, additions, or comments? E-mail me.

Still to come:There won't be an October shutdown; Massachusetts passes a healthcare spending cap; the Postal Service defaults; the House will move on just disaster aid; and an elephant just wants to hang out at the pool.

Economy

Congressional leaders reached a six-month spending deal. "Congressional leaders reached a short-term spending deal Tuesday that would remove the possibility of a government shutdown from the fall campaign season, as fiscal conservatives who swept into office after the 2010 midterm elections on promises to battle for lower spending at every turn showed a new willingness to pick their fights as they seek a big win in November. Under an agreement announced by House Speaker John A. Boehner (R-Ohio) and Senate Majority Leader Harry M. Reid (D-Nev.), Congress would agree to fund the government for six months when the current fiscal year ends on Sept. 30, setting agency spending for the year at $1.047 trillion, as agreed to in last summer’s debt deal. It is just above this year’s level of $1.043 trillion...Reid and Boehner said that more time is needed to draft the deal into legislation and that it will not come up for votes in the House and the Senate until September, when Congress returns from a six-week recess." Rosalind Helderman in The Washington Post.

@damianpaletta: Deal to fund govt for 6 months beginning Oct. 1 is notable, seems like 1st mjr spending deal in last 2 yrs that didn't go down to the wire.

It's unclear how effective government retraining programs are. "The Obama administration has been promoting the retraining of unemployed workers as a linchpin of its economic-recovery plan. The federal government spent about $18 billion on training and job-search programs, running 47 separate programs offering training, in the year ended September 2009, the most recent tally by the Government Accountability Office. And that doesn't include some state and local programs that use federal funding to train workers. But government efforts to determine the effectiveness of the programs have been spotty, at best. It doesn't keep track of how many people receive federally funded training. Some training programs don't bother to monitor whether the unemployed workers who complete them succeed in landing jobs related to their training. For programs that do track job placement, the data are far from conclusive." Ianthe Jeanne Dugan and Justin Scheck in The Wall Street Journal.

Indicators were worse before previous unconventional Fed actions. "The Federal Reserve's unconventional measures to boost the recovery in recent years have followed a pattern in benchmarks of the economy's health. In months before past Fed action, private payroll growth worsened, the economy stalled or contracted and stocks weakened, depressing consumer and business confidence. Today, as policy makers at the central bank consider whether to take another, similar step, most of those indicators look better, on a relative basis, than they did before earlier rounds of Fed support." Sudeep Reddy in The Wall Street Journal.

The personal savings rate continues to rise. "Americans are earning more money--but socking it away and not spending, undermining hopes for a consumer-driven rebound. The personal saving rate, which measures savings as a percentage of disposable income, jumped to 4.4% in June from 4% a month earlier and a recent low of 3.2% in November, the government said Tuesday, as consumers squirreled away cash amid the weak economy. Spending on everything from vacations to clothes was largely flat in June. Spending fell less than 0.1%, after easing 0.1% in May, even though Americans' income after taxes rose 0.4%, the most since March. Consumer spending is the biggest single driver of the U.S. economy, accounting for roughly two-thirds of demand." Neil Shah in The Wall Street Journal.

@JoshZumbrun: One huge reason things are sluggish: Personal savings has climbed to 4.4% in June from 3.2% in November. #NotNecessarilyTerribleNews

Stars looking pretty interlude: A 360 degree panoramic time lapse of the night sky.

Health Care

Massachusetts will cap health care costs. "The Massachusetts legislature passed a first-in-the-nation bill on Tuesday that seeks to limit the growth of health care costs in the state. The bill would not allow spending on health care to grow any faster than the state’s economy through 2017. For five years after that, any rise in health care costs would need to be half a percentage point lower than the increase in the state’s gross domestic product. Legislative leaders say the bill, which includes other cost-slowing provisions, could save as much as $200 billion in health care spending over the next 15 years...Gov. Deval Patrick, a Democrat, has been pushing for a plan to rein in health spending, promising that Massachusetts would show other states how to 'crack the code on costs.' He is expected to sign the bill." Abby Goodnough in The New York Times.

Two major provisions of Obamacare take effect today. "Two major provisions of the health-overhaul law take effect Wednesday, testing employers' ability to adapt to changes the measure mandates. The law requires employers to distribute millions of dollars in insurance-company refunds to workers whose plans spent a high percentage of their premium dollars on administrative expenses instead of medical care. Employers also will have to begin including contraception and other women's services in workers' insurance plans without charging employees co-payments or other fees...Although the contraception requirement officially takes effect Wednesday, many employer health plans don't have to start complying until their new policy year begins, which is typically Jan. 1. Some religiously affiliated employers, such as universities and hospitals, don't have to comply for another year." Louise Radnofsky in The Wall Street Journal.

A bill to restrict abortion fell short in the House. "A majority of the House backed a bill to ban abortion in the District of Columbia after 20 weeks of pregnancy, but the legislation still failed to get the votes needed to pass. Rep. Trent Franks’ 'District of Columbia Pain-Capable Unborn Child Protection Act' was considered under a procedure that requires two-thirds of the House to pass. The bill fell short of that level with a final vote of 220-154 -- six Republicans voted against the bill and 17 Democrats voted for the measure...The restriction would not apply in situations where the life of the mother was threatened but it would criminalize abortions after 20 weeks even in cases of rape, incest and fetal abnormalities. Doctors would face up to two years of jail time and fines for not complying with the law." Kate Nocera in Politico.

Domestic Policy

The Postal Service will default today. "The U.S. Postal Service, facing a $14.1 billion loss this fiscal year amid plummeting mail volume, will default for the first time Wednesday, on a congressionally mandated $5.5 billion payment to the U.S. Treasury. Postal officials said Monday that without close to that sum in the bank, they can’t make the payment, which is part of a 10-year plan to set aside health benefits for retired postal workers. Another bill for roughly the same amount is due in September, but it will likely meet the same fate. The agency assured customers this week that the default will not affect mail delivery or employee paychecks. Benefits for current retirees are funded. There is no legal penalty for missing the payment: It originally was due last year, but Congress moved the deadline." Lisa Rein and Ed O'Keefe in The Washington Post.

Everyday life interlude: An elephant crashes a pool party.

Energy

The House will only vote on a disaster aid package. "Facing certain defeat, Republicans pulled their one-year farm bill extension from the House docket late Tuesday in favor of a narrower $383 million disaster aid package to address the immediate needs of drought-stricken livestock producers. The abrupt turnaround came just minutes before the House Rules Committee had been slated to take up the extension in anticipation of floor votes Wednesday. Within hours, the slimmer 22-page disaster bill had been filed with the promise of floor votes Thursday...The substitute will restore livestock indemnity and forage programs that have expired in the current farm program, with some assistance also for specialty crops. To keep down costs, the aid will apply only to 2012, while offsets will come from imposing caps on two conservation programs much as the House Appropriations Committee has already proposed in its 2013 budget bill. Early estimates indicate the net savings would be about $256 million." David Rogers in Politico.

The drought won't hit most farmers too hard. "A historic drought across the middle of the U.S. is shriveling crops--but not many farmers' incomes, as widespread use of crop insurance and record corn and soybean prices cushion the blow to growers. Farmers already are giving up on crops in parts of the Midwest as hot, dry weather shrinks corn stalks and leaves some cobs without a single kernel. Still, economists don't expect incomes for commodity-crop farmers to slip drastically, keeping one of the strongest sectors of the U.S. economy humming...At the same time, the drought is having a big impact on chicken farmers and cattle ranchers, who are paying record prices for feed, which is expected to translate into a 3% to 4% rise in food prices. Milk, cheese and other dairy products are also headed upward, and higher commodity prices are expected to squeeze margins for food companies." Mark Peters in The Wall Street Journal.

Congress isn't eager to talk about climate change. "The planet may be getting hotter, but Washington’s debate on climate change isn’t heating up. Amid a summer marked by droughts, wildfires, record temperatures and freak storms, Congress is squeezing in just one hearing on the changing climate before it dashes out for a hot August recess. And that hearing, set for Wednesday, is unlikely to be a show-stopper: No federal officials will testify, and no big-name witnesses will appear -- none of the elements that could help this gathering compete for an Olympics-mad public’s attention. " Darren Goode in Politico.

Wonkbook is compiled and produced with help from Karl Singer and Michelle Williams.

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