Edward DeMarcoheads the Federal Housing Finance Agency (FHFA). He’s a temp, in office only because — no surprise — Senate Republicans, led by Richard Shelby (Ala.), refused even to allow a vote on the man President Obama nominated for the post.
And DeMarco is philosophically opposed to the common-sense solutions needed to deal with the housing crisis.
When Fannie Mae and Freddie Mac — holders or guarantors of about 60 percent of housing mortgages — were bailed out, the FHFA was tasked with supervising their activities, with a mandate to minimize taxpayer losses. That gives DeMarco extraordinary power.
As the Federal Reserve has detailed, falling housing prices are a continuing drag on the recovery. Homeowners have lost a staggering $7 trillion in the value of their homes since early 2006 as home prices fell an average of about 33 percent. Homes are the prime investment of middle-class families, and when home values fall, families begin to cut back on purchases. This slows the entire economy.
With foreclosure, the effects are even worse. Foreclosure is a tragedy for those who lose their home and an economic calamity for their neighbors, who watch their houses plummet in value. It is costly to creditors, for the loss on foreclosed properties often exceeds what might be gained through renegotiating the mortgage. And foreclosures in large numbers impede a recovery, driving housing prices into a death spiral.
The Federal Reserve concludes that is what we face now. Millions have lost their homes already, and millions more are on the verge. A stunning 12 million homeowners — one in five with mortgages — are “under water,” meaning their homes are worth less than their mortgage.
Some of these victims had taken former Fed chair Alan Greenspan’s advice and took out a subprime or variable-interest loan with a small down payment to buy a house, on the assumption that values would continue to rise. When prices fell, these buyers not only lost their down payment, they couldn’t refinance their loans when their variable rates kicked up.
More of these underwater homeowners, however, are simply bystanders — collateral damage — to the banking folly. They hold prime mortgages, put down 20 percent and now find themselves unable to refinance or to sell. Their investment is gone.
So a growing chorus of voices — from Obama to Fed Chairman Ben Bernanke — have called for programs that would refinance underwater loans, particularly by reducing the principal owed so homeowners can stay in their homes.
Small-scale experiments have shown this approach can save creditors money. But the banks want to avoid putting a real price on the mortgages they own for as long as possible, while loan servicers are set up to manage loans, and often have neither the staffing nor the incentive to deal with homeowners in trouble. One aim of the multibillion-dollar settlement just inked by attorneys general of several states and five big banks was to require the setup of procedures to facilitate refinancing and principal reduction.