Principal reduction has been a sticky enough topic for Ed DeMarco. It just got even stickier.
The director of the Federal Housing Finance Agency announced his opposition to the tactic that is sometimes used to avoid costly foreclosures on July 31, defying Treasury Secretary Timothy Geithner. The announcement may have come as no surprise given that last year President Obama tried unsuccessfully to dump DeMarco, the man tasked with overseeing government-backed mortgage giants Fannie Mae and Freddie Mac.
Now, some administration allies and liberal commentators are calling for the president to finish the job.
Demarco backed his controversial position by arguing that the financial benefit to taxpayers from principal reductions would be unsubstantial, while introducing "moral hazard" into the housing market. Progressive commentators and administration officials are anything but convinced.
Nobel prize-winning economist and New York Times columnist Paul Krugman wrote in a blog post, subtly titled "Fire Ed DeMarco," that the FHFA director was mistaken on both the economics of the proposed principal reduction program and on his job description:
"I don’t know what DeMarco’s specific legal mandate is. But 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. This guy needs to go."
Treasury Secretary Timothy Geithner also expressed criticism over DeMarco's decision. Claiming that DeMarco had omitted details from his letter to Congress, the Treasury Secretary stated that principal reductions would provide "help to a significant number of troubled homeowners, help repair the nation's housing market and result in a net benefit to taxpayers," in a competing letter released to the public. Geithner also wrote that DeMarco's action wasn't "the best decision for the country."
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Below are the people who support and oppose Ed DeMarco's decision not to reduce mortgage principal:
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Pro-Principal Reduction
Paul Krugman, Nobel Prize Winning Economist
Nobel Prize-winning economist and New York Times columnist has repeatedly called for FHFA director <a href="http://krugman.blogs.nytimes.com/2012/07/31/fire-ed-demarco/" target="_hplink">Ed DeMarco to be fired</a> over his his opposition to principal reduction. In addition to arguing that principal reductions would benefit the overall economy, Krugman told his readers that "deciding whether debt relief is a good policy for the nation as a whole is not DeMarco's job."
Timothy Geithner, U.S. Treasury Secretary
Treasury Secretary Timothy Geithner stated that principal reductions would help up to 500,000 homeowners and save taxpayers up to $1 billion, in <a href="http://www.huffingtonpost.com/2012/07/31/ed-demarco-principal-reduction_n_1724880.html" target="_hplink">a letter he wrote to Ed DeMarco. </a> He also wrote that DeMarco's resistance to principal reductions was not "the best decision for the country, because, as we have discussed many times, the use of targeted principal reduction by the GSEs would provide much needed help to a significant number of troubled homeowners, help repair the nation's housing market, and result in a net benefit to the taxpayer."
Rep. Elijah Cummings (D-MD)
Rep. Elijah Cummings is less than thrilled by Ed DeMarco's decision not to provide principal reductions. Cummings wrote in <a href="http://www.huffingtonpost.com/2012/07/31/ed-demarco-principal-reduction_n_1724880.html" target="_hplink">an email</a>:
<blockquote>"It is incomprehensible that Mr. DeMarco would reject the chance to save up to a billion dollars in taxpayer funds while helping nearly half a million homeowners stay in their homes," Cummings said. "He should immediately withdraw this reckless and misguided letter and start following the law Congress passed."</blockquote>
James Lockhart, Former Chairman Of The Federal Housing Finance Agency Chairman
President George W. Bush's Chairman of the Federal Housing Finance Agency, James Lockhart (seated to the far right), has argued that the FHA ought to experiment with principal reductions, <a href="http://thehill.com/blogs/on-the-money/1091-housing/225101-cummings-housing-regulator-fhfa-wasting-taxpayer-money-by-refusing-principal-forgiveness" target="_hplink">the Hill reports.</a> "Foreclosure is not the answer. ... We're destroying neighborhoods with foreclosures."
Sen. Richard Durbin (D-IL), Senator Majority Whip
Senate Majority Whip Richard Durbin (D-IL) told reporters that he believed DeMarco's decision was "short-sighted" and "an abdication of his responsibilities, " <a href="http://thehill.com/blogs/on-the-money/banking-financial-institutions/241343-fhfa-opts-against-principal-mortgage-reductions" target="_hplink">the Hill reports.</a> "The alternative to principal reduction is foreclosure -- a disastrous outcome for homeowners, taxpayers and the American economy. It is way past the time for leadership to stabilize our real estate market."
Shaun Donovan, Secretary of Housing and Urban Development
Secretary of Housing and Urban Development, Shaun Donovan, has urged the use of principal reductions to prevent foreclosure, <a href="http://thehill.com/blogs/on-the-money/1091-housing/225101-cummings-housing-regulator-fhfa-wasting-taxpayer-money-by-refusing-principal-forgiveness" target="_hplink">the Hill reports.</a>
William Dudley, President Of The New York Federal Reserve
William Dudley, president of the New York Federal Reserve, argued for the development of an earned principal reduction program for borrowers who are underwater but still making mortgage payments, <a href="http://www.newyorkfed.org/newsevents/speeches/2012/dud120106.html" target="_hplink">In a speech to the New Jersey Bankers Association. </a>
Christine Lagarde, International Monetary Fund Managing Director
International Monetary Fund managing director, Christine Lagarde, argued that the U.S. should implement some form of mortgage relief, including principal reduction, in <a href="http://www.huffingtonpost.com/anna-cuevas/imf-lends-support-to-loan_b_1447133.html" target="_hplink">a speech she delivered at the Brookings Institute earlier this year.</a>
President Obama
The Obama administration has long supported principal reductions, arguing that such write-downs would reduce delinquencies, help 11 million underwater borrowers and help get the housing market back on track, <a href="http://www.reuters.com/article/2012/05/10/us-usa-housing-donovan-idUSBRE8491DW20120510" target="_hplink">Reuters reports.</a>
Under DeMarco's directorship, the FHFA blocked the White House's idea for home-energy improvement when it told firms not to participate, <a href="http://www.washingtonpost.com/politics/edward-j-demarco/gIQAK9StKP_topic.html" target="_hplink"><em>the Washington Post</em> reports.</a> President Obama attempted to replace DeMarco with North Carolina banking commissioner Joseph Smith in 2010, only to be rebuffed by Senate Republicans who refused to confirm Smith, leaving DeMarco in place.
Anti-Principal Reduction
Rep. Darrell Issa, House Government Reform And Oversight Committee Chairman
House Government Reform and Oversight Committee Chairman, Rep. Darrell Issa (R-CA), wrote a letter to DeMarco urging the FHA director to "carefully evaluate relevant information prior to making a decision that could cost taxpayers billions if the government were to pay down the principal value of underwater mortgages for select homeowners," <a href="http://thehill.com/blogs/on-the-money/1091-housing/225383-house-republicans-urge-housing-regulator-to-remain-steadfast-on-principal-reductions" target="_hplink">The Hill reports.</a>
Rep. Spencer Bachus (R-AL), Chairman Of House Financial Services Committee
Chairman of the House Financial Service Committee, Rep. Spencer Bachus (R-AL), told reporters that Ed DeMarco stood up for "the best interests of the American people" by rejecting principal reduction, <a href="http://www.nytimes.com/2012/08/01/business/us-agency-bars-fannie-and-freddie-from-reducing-principal.html" target="_hplink"><em>The New York Times</em> reports.</a>
Sen. Bob Corker (R-TN)
Sen. Bob Corker (R-TN) <a href="http://www.corker.senate.gov/public/index.cfm?p=News&ContentRecord_id=f3d4c62d-0f70-42fc-b485-99d0bb6b05b4" target="_hplink">thanked Ed DeMarco</a> for "making his decision based on objective analysis and with the taxpayer in mind."
American Bankers Association
ABA executive vice president on mortgage policy, Bob Davis, announced the association's support for Ed DeMarco's rejection of principal reduction, <a href="http://thehill.com/blogs/on-the-money/banking-financial-institutions/241343-fhfa-opts-against-principal-mortgage-reductions" target="_hplink">the Hill reports.</a> "As FHFA's research illustrates, principal reductions do not measurably help troubled borrowers avoid foreclosure, yet increase the cost to taxpayers at a time when our nation's fiscal situation is already strained."
Edward DeMarco, Federal Housing Finance Agency Acting Director
Acting director of the Federal Housing Finance Agency, Ed DeMarco, announced to Congress that he would <a href="http://www.huffingtonpost.com/2012/07/31/ed-demarco-principal-reduction_n_1724880.html" target="_hplink">not permit mortgage giants Fannie and Freddie Mac to assist struggling homeowners by reducing their principal.</a> In a letter DeMarco sent to Congress, the acting director stated that he did not believe that there would be a substantial financial benefit to the taxpayer and that reducing principal would introduce "moral hazard" into the housing market. "This could give borrowers who are current on their mortgages a message that the government endorses forgiving a portion of mortgage debt if hardship can be demonstrated, creating a very broad incentive for underwater borrowers to seek ways to become eligible."
Under DeMarco's directorship, the FHFA blocked the White House's idea for home-energy improvement when it told firms not to participate, <a href="http://www.washingtonpost.com/politics/edward-j-demarco/gIQAK9StKP_topic.html" target="_hplink"><em>The Washington Post</em> reports.</a> President Obama attempted to replace DeMarco with North Carolina banking commissioner Joseph Smith in 2010, only to be rebuffed by Senate Republicans who refused to confirm Smith, leaving DeMarco in place.<a href=" Under DeMarco's directorship, the FHFA blocked the White House's idea for home-energy improvement when it told firms not to participate, a href="http://www.washingtonpost.com/politics/edward-j-demarco/gIQAK9StKP_topic.html" target="_hplink"emThe Washington Post/em reports./a President Obama attempted to replace DeMarco with North Carolina banking commissioner Joseph Smith in 2010, only to be rebuffed by Senate Republicans who refused to confirm Smith, leaving DeMarco in place.a href="http://www.huffingtonpost.com/peter-s-goodman/ed-demarco-fannie-freddie-principal-reduction_b_1336190.html" target="_hplink"http://www.huffingtonpost.com/peter-s-goodman/ed-demarco-fannie-freddie-principal-reduction_b_1336190.html/a" target="_hplink"> leaving DeMarco in place.</a>
Principal reduction has been a sticky enough topic for Ed DeMarco. It just got even stickier.
The director of the Federal Housing Finance Agency announced his opposition to the tactic that is somet...
Principal reduction has been a sticky enough topic for Ed DeMarco. It just got even stickier.
The director of the Federal Housing Finance Agency announced his opposition to the tactic that is somet...
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Suppose you are going to repair your damaged home and your only tool on hand is a roll of duct tape. Your resourceful neighbor points out that you could probably also use a hammer, a drill, and a saw. If you're the FHFA, you tell him, "I can do a better job with just my duct tape, so thanks but no thanks." That, in a nutshell, is the problem with the most recent analysis by this key regulator of the mortgage giants Fannie Mae and Freddie Mac when it comes to adding the tool of principal reduction to their anti-foreclosure toolkit. They've made progress in their evaluation of the costs and benefits of loan forbearance and loan forgiveness, but, somewhat bewilderingly, they appear to be comparing the two as if they were mutually exclusive.
DeMarco's still an unelected ideologue with too much power, and he still needs to go. But yesterday, he finally spoke up. To anyone with the right political or emotional closed-captioning device the message was loud and clear: Don't rush me, Mr. President -- and find yourself another fall guy.
Dear Mr. Ed DeMarco please step down from your post if you are not going to help the homeonwer
You could have easily implemented an earned principal reduction program or PRA for borrowers who are underwater but still making mortgage payment ... and not to those who were squatting & strategically defaulting.
you wouldve been able to safe face with congress and the american homeowners. it wouldve been a win win for everyone
instead you chose to deliberately stope and block help.
you need to be removed from your position immediately.
hopefull4: Dear Mr. Ed DeMarco please step down from your post
“Rhetoric is a poor substitute for action, and we have trusted only to rhetoric. If we are really to be a great nation, we must not merely talk; we must act big.”
- Theodore Roosevelt
It is ok to disobey if the order is morally and ethically wrong.
But not enforcing a valid law is, simply, disobedience and disrespectful.
Every single day that DeMarco is in office is evidence of Obama's timidity and weakness.
Every single day that DeMarco is in office is evidence of Obama's real agenda and will - that Obama does not want to fix this problem.
iridium53: “Rhetoric is a poor substitute for action, and we have
This kind of sabotage by Republican hold overs is a serious handicap for the President in his efforts to improve the economy. And, it is deliberate since the continuing jobs recession is the Republicans' one hope to recapture the government.
Yet, the gridlock is no reason to surrender to the Republicans since the actions they contemplate are the same as led to the present crisis -- only a step beyond and worse.
billw8017: This kind of sabotage by Republican hold overs is a
While DeMarco is probably a tool of the republicans, why did Obama leave him in office for the length of his first term. Yes, the republicans were blocking appointments but Obama could have made a recess appointment long ago, instead he did nothing. Politics is a "contact sport" and Obama seems too timid to play successfully.
Donatella: While DeMarco is probably a tool of the republicans, why
Aside from being a Constitutional lawyer and respectful of Congress, Barack Obama would have learned as a community organizer to avoid confrontation but bring people together to solve the real problems of the people. This may have been a serious mistake in dealing with the Republicans, but it does give him some moral authority as he begins to reveal the strong politician within the agreeable shell.
billw8017: Aside from being a Constitutional lawyer and respectful of Congress,
You're being too kind. Obama has been a successful moderate republican but as a democrat he's been a failure. He's continued all of Bush's foreign policies and actually become more radical in some like assasinations. On domestic policies he's done very little for the average American but has protected the financial industry. Moral authority is useless if it does not implement policies for the benefit of the American public.
Donatella: You're being too kind. Obama has been a successful moderate
The banks created the bubble.
The people used the tool that was put before them.
Those homeowners need someone on their side to help them stay in their homes.
But, any outright fraud on either side of the transactions needs laws applied.
iam99: The banks created the bubble. The people used the tool
Foreclosures cost banks money and the best they can hope for is to resell the homes at market prices. For some homes and some neighborhoods, this has to be a complete loss. Vacant homes are vandalized and depress all housing values. In cities like Detroit, there are actual businesses, not necessarily legal, that gut foreclosed homes.
billw8017: Foreclosures cost banks money and the best they can hope
Principal reduction is a must! Not only in the US but in every place where the mega-bubble inflated financial wealth far beyond what is backed by real wealth.
You can't expect to keep the purchasing power of your savings financial assets if the economy sinks.
Look at the nonsense that is going on in Europe, with Germany and other stubburn "lenders" just looking at their financial assets and not looking after the real European economy.
DeMarco and followers belong to the same kind of idiots that want to squeeze more golden eggs of the chicken even if by doing so they break the chicken's neck.
mrnaer: Principal reduction is a must! Not only in the US
The one country which is doing well should not be - their economy is too small, they were in worse shape than other countries in Europe and they had no backing from ANYONE. BUT - they arrested the bankers and the finance ministers and took their assets, they brike up the banks and nationalized the worst ones, they told the Mortgage people AND the big US and German and French and English banks to take a hike and they refused to pay. Iceland did it and it worked very well. If we did the same things they did - Geithner, Paulsen, Bernanke and most of the Economic Advisers would be in Jail. THe CEOs and upper level people in ALL the big banks and companies like AIG and the big brokers would be either in jail or out on bail. Their houses and cars and bank accounts and investment accounts would have been seized. AND the big banks would be little banks which would not be allowed to buy and sell stocks, insurance, CDOs or any of the crap they still do.
whitcombc: The one country which is doing well should not be
I would had loved that something similar had happened, for instance, in Spain. And wish every economy was as small as Icelannd and all managers and politicians could be made accountable for the mess they caused. Unfortunately it seems that beyond certain country size the insitutional cover up is so well designed and citens so unarticulated that all we can do is swallow our anger.
mrnaer: I would had loved that something similar had happened, for
What I been writing to the White House as an ex-mortgage loan officer is the break down of mortgages is simply and we have the tools to fix most of these problems, however you got to be from Harvard and stupid before they listen.
The key fact that tells us Geithner is an idiot to mortgages was the Jan 2008 State Level Subprime Loan Characteristics where the stats where complied from number his bank collected.
We have give Obama 3.5 yrs and he has allowed banks to handle the allege cure. But not dealing with this situation of allowing folks to refinance back in 2009! However here we are in Aug 2012 and the Treasury Secretary is publicly releasing a cover my butt letter to have DeMarco in the last months to allow some action is unforgettable mistake on President Obama plate.
charlesamerica: What I been writing to the White House as an
We've been dealing with this mess for 4 years. There's not going to be a perfectly fair solution. The question is do we waste another 4+ years in doing next to nothing and rejecting every proposed solution because it's not fair; or do we accept that it's more important to find a solution to this problem and get it resolved?
dizmo4: We've been dealing with this mess for 4 years. There's
Where is fair in the financial crisis and its aftermath? Bankers have gotten off scot free, in fact have more power over the financial system - while wrecking the economy, families, jobs, heck, even lives if we do a "fair" assessment of the impact of their casino gambling.
In answer to your questions, I'm kind of for moving on already. Let's, however, keep the citizen, the human, at the center of the solution... I think the solutions will become clearer once we really make that the litmus test of any policy. Obama could have done better on that account. But the GOP can be pointed to obstructing many of his initiatives, in fact all of them.
einzelgaenger: Where is fair in the financial crisis and its aftermath?
AH, for the good old days, when you had to deposit an undated letter of resignation with the boss, mayor, governor or POTUS. Too bad we can't require them from some of our senators and representatives of both parties.
whirdy: AH, for the good old days, when you had to
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The Huffington Post | By James Sunshine Posted: 08/01/2012 6:18 pm Updated: 08/01/2012 6:21 pm