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NPR/Pro Publica Story on Fannie/Freddie Principal Mod Analysis Falls Apart

Tom Lawler, the housing economist and former chief economist at Fannie Mae, has a commentary up that calls into serious question that NPR/Pro Publica story about how Fannie and Freddie have some secret new analysis showing that principal reductions would be not only cost-effective for the GSEs, but cost-effective to the taxpayer.

Let me say up front that I believe, based on all the analysis I have read, that principal reductions would be long-run positive over foreclosures in cases where the borrower has an ability to pay. But that’s not quite the issue here. The issue is that NPR and Pro Publica are claiming that some secret analysis exists where even Fannie and Freddie believe this. That puts the onus squarely on Ed DeMarco, and makes him more of a villain holding back the housing rebound.

Lawler takes issue with one part of the NPR/Pro Publica story, the part which claims that “loan forgiveness wouldn’t just help hundreds of thousands of families (stay) in their homes,” but that also “it would help taxpayers” by saving Freddie and Fannie money. That’s not true, Lawler says, because the only way principal reductions end up saving Freddie and Fannie money is through the recently super-sized HAMP incentives for principal reductions going to them. And of course, those incentive payments, routed through TARP, come from taxpayers.

But Lawler reveals a bit too much here. Check it out:

Other reports, including an interview with Freddie’s CEO, indicate that the GSEs’ analysis finds that principal reductions would be “cost effective” for the GSEs ONLY after factoring in the new, turbo-charged incentives Treasury would pay to the GSEs (and other lenders/investors) for doing a principal reduction under HAMP […]

So here’s the “taxpayer” scoop: as best as I can tell, the GSEs’ analysis (which, to be fair, some have questioned) suggests that principal reductions would NOT make sense for them (or, implicitly, for taxpayers) without any Treasury/taxpayer incentive payments. However, IF the GSEs receive hefty incentive payments from Treasury/taxpayers to engage in principal reductions, then in some cases doing so WOULD make sense to the GSEs – but NOT to taxpayers!

Unless I miss my guess, Lawler, who as former chief economist for Fannie is in a position to know, just blew up the NPR/Pro Publica story. Because he’s saying here that the GSE analysis thus far does not support principal reductions. That’s a direct contradiction to the NPR/Pro Publica story. Their story is based on some new, secret analysis, which Lawler implies doesn’t exist. This is the story I’ve heard as well – NPR and Pro Publica based their claim of “new analysis” on some informal document.

In fact, Lawler catches this Housing Wire article with Freddie Mac’s CEO saying on Friday – the same day as the NPR/Pro Publica “secret analysis” piece came out – that the agency would have to do some new analysis:

“I have to say recently the Treasury sweetened the program and tremendously increased the incentive payments in their offer to us,” Freddie Mac CEO Charles “Ed” Haldeman said at HousingWire’s REThink Symposium. “We will reevaluate that to see what may be in our economic best interest. If there are very large incentive payments — which could be 50% of what you could write down — it may be in our economic self-interest to participate in that.”

“Will re-evaluate” – i.e. there is no evaluation yet, but we’ll do it in the future.

Now, I hope they do re-evaluate. The HAMP incentive payments are supposed to go indirectly to homeowners in the form of encouraging loan mods, including principal write-downs. If that tips Fannie and Freddie into the write-down column, great. They’ll still have to figure out the second lien issue, but they could start on clear first liens with no second. It would help people. Yves Smith has lots more on all of these issues which I’ve been hashing out over the past two days.

But the important thing here is that Lawler’s admissions suggest that the NPR/Pro Publica article is bullshit. And to be sure, that’s what has prompted this new round of condemnation against Ed DeMarco. Only it’s made up. There’s a full-court press to use whatever means necessary – true or not – to vilify DeMarco and ignore the terrible housing policy from the rest of the Administration. And NPR and Pro Publica are at the head of it.

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David Dayen

David Dayen

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