In a major step towards helping ailing homeowners, the two behemoths of Fannie Mae and Freddie Mac concluded that it makes “good financial sense” to write down underwater mortgages. Democrats and activist organizations have pushed this message for quite a while yet find a foe in the administration.
Interim head of the Federal Housing Financing Agency, Edward DeMarco, disagrees with the idea and is currently blocking it. New Bottom Line calls him a career bureaucrat and notes that he is a holdover from the Bush Administration.
As a result, the organization is pushing for President Barack Obama to fire him.
“With eleven million homeowners owing more than their home is currently worth, principal reduction is not only the best option to keep families in their homes. It also makes good financial sense: reducing principal will not only put money back into communities, but it will also reduce the number of people who simply give up and walk away from an underwater mortgage,” says New Bottom Line.
Some economists call principal reduction a game changer.
“Principal reduction works,” says Mark Zandi, chief economist of Moody’s Analytics. “If someone gets a reduction in their principal amount, it gives them a powerful hook to really fight to try to hang on to the home and not go into foreclosure.”
It could mean relief for a half million families. Others agree with DeMarco and do not want to see it happen.
“I think DeMarco is absolutely right,” says Anthony Sanders, a professor at George Mason University. He says that if Fannie and Freddie start forgiving big chunks of what many people owe on their mortgage, they risk triggering a huge wave of strategic defaults. That is, people who don’t really need the help would default on purpose to try to get it.
The thinking from Sanders is almost Ayn Randian in that people are parasites on the system. But nearly 15 percent of all recent loan modifications have involved principal reduction and yet Sanders’ fears are unfounded.
DeMarco claims to be protecting the interest of the taxpayer, since the federal government bailed out Freddie Mac and Fannie Mae. This short-term thinking ignores the problem of forcing more homeowners out and the further worsening of the housing market with more foreclosures.
Rose Gudiel shared her story earlier this month outside of the U.S. Capitol building.
Photo by TheTruthAbout