Refinancing with principal reduction is the most efficient way to avoid foreclosures, at the same time that the economy is revitalized because these consumers have more money left in their pockets.
This is a policy the Obama administration wants to implement. But it has been unable to because the acting director of the Federal Housing Finance Agency (FHFA), Edward DeMarco, strongly opposes it.
A few days ago, this official rejected for the third time the efforts of the Treasury Department to allow Fannie Mae and Freddie Mac, the mortgage agencies rescued by the federal government, to do principal reductions for “underwater” homeowners-those who owe more money than their homes are worth. His argument is that in balance, this policy is more detrimental to taxpayers-who own Fannie and Freddie-than helpful to homeowners. Previously, DeMarco had also expressed his support for quick foreclosures for lack of other options.
In reality, there have been other government programs, but DeMarco has been against them. Fannie and Freddie are not even part of the federal settlement with the country’s main banks. This refusal allows one million homes with mortgages held by one of the two agencies to be excluded from all help.
DeMarco’s background is that of a bureaucrat who was appointed as acting director of the FHFA, an agency created out of the 2008 crisis, in the first days of the Obama administration. His position against principal reductions -also opposed by the banks- earned him the sympathy of the Republicans in the Senate who blocked the confirmation of Obama’s permanent candidate for the position.
To summarize, the ideological stubbornness of a bureaucrat, the law that created the FHFA and the opposition’s obstructionism in the Senate are combining to prevent the most distressed homeowners from getting help. This hurts both homeowners and the economy.