EDWARD J. DeMARCO is once again in the Obama administration’s doghouse. The acting director of the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac while they are in federal conservatorship, has refused to allow the mortgage giants to offer debt reductions to homeowners who owe more on their properties than they are worth on the market. Mr. DeMarco’s refusal has incurred the wrath of the administration and a wider circle of mostly left-leaning critics who say that he is standing in the way of a nearly costless measure that would aid economic recovery.
The truth is that Mr. DeMarco has made a defensible judgment call on a politically polarized question that is, in policy terms, actually very close.
Basically, the Obama administration proposes to write down the loan balances of up to a half-million underwater borrowers, saving them tens of billions of dollars — the equivalent of a middle-class tax cut in both size and stimulative impact.
Who would pay? Partly, Fannie and Freddie’s bondholders, because they would get bought out at par, instead of the premium at which the securities currently trade. Also partly, taxpayers, who would supply a $2.7 billion subsidy from the leftover Treasury Department’s Troubled Assets Relief Program (TARP). But when you factor in the benefit to Fannie and Freddie from fewer defaults, the taxpayer actually comes out almost $1 billion ahead, according to a Treasury analysis.
Not so fast, says Mr. DeMarco. The vast majority — 75 percent — of Fannie and Freddie’s 4.6 million underwater borrowers (fewer than half the national total of 11 million, by the way) are current on their loans. As soon as underwater homeowners get wind of the fact that Fannie and Freddie are offering write-downs to some borrowers who are in default, others who are not in default will try to get in on the action. If there are as few as 3,000 “strategic defaults,” Mr. DeMarco argues, the principal reductions will result in net losses to the taxpayer.
Many of Mr. DeMarco’s critics say that isn’t a legitimate objection for him because his only legal role is to protect the financial soundness of Fannie and Freddie; Treasury is in charge of the federal deficit. Mr. DeMarco’s statutory mandate includes the responsibility to make sure Fannie and Freddie “preserve and conserve” their (taxpayer-supplied) capital, as well as operate “consistent with the public interest.” That can be read to include not only the fiscal impact of two organizations that have already absorbed more than $188 billion in taxpayer aid but also the market repercussions of offering principal reductions to some people who have stopped meeting their contractual obligations while others have sacrificed to keep theirs.
In a letter to Mr. DeMarco lamenting his decision, Treasury Secretary Timothy F. Geithner says that he isn’t giving up. That’s his right. But with signs multiplying that the housing market may be finally bottoming out without this additional stimulus, perpetuating this particular battle does not strike us as the best use of the secretary’s time.