Missing the Point on DeMarco and Principal Reduction
DeMarco discussed “limited benefits” from principal reduction for a reason – he’s not looking to write down current mortgages. This happens to represent 3/4 of all underwater homes in the Fannie and Freddie portfolio. DeMarco – and the Administration – has a strategy for current underwater homes, and that’s refinancing, through HARP 2.0.
But once you narrow the window for principal reduction to seriously delinquent underwater homes held by the GSEs, you necessarily limit the affected set to about 1 million homes overall, less than 1/10 of the total underwater homes in the country. And DeMarco is talking about less than that, a universe of “several hundred thousand” borrowers. That’s why you see such relatively small numbers getting bandied about. DeMarco says that, with the recently tripled financial incentives in HAMP, principal reduction would save the GSEs $1.7 billion over principal forbearance. But the GSE’s hold $4.5 trillion in their portfolios; $1.7 billion is a rounding error.
This calls into question why this has been such a focus of the progressive coalition seeking accountability and relief for homeowners. It’s only going to hit a small slice of the market. Jeff Merkley sounded indignant about how the program as DeMarco envisions it would be “no silver bullet,” but what is he really saying? That DeMarco should write down current borrowers? Not even the foreclosure fraud settlement mandates such a thing. I say go for it, but not one policymaker has said it out loud. Yet that’s the implication of their grumbling about DeMarco.
Furthermore, DeMarco is actually being OVER-optimistic in his targets for how many borrowers a principal reduction program would reach. In his sample analysis, with 691,000 homes affected, he claims that $3.8 billion in HAMP funds would have to be disbursed. We’re aware that HAMP, in three years, has paid out less than $3 billion, right? I don’t know why anyone should expect that a program which the community of borrowers hate, which hasn’t delivered on any of its promises for three years, will suddenly double its disbursements immediately due to the GSEs signing on to principal reduction. Even with the trebled benefits, that doesn’t make a lot of sense. The idea that we should care about a “net loss to the taxpayer” on HAMP funds, when they were earmarked three years ago to help homeowners, is ridiculous. But it’s also ridiculous to expect that program to get suddenly competent and immediately pay out its benefits in a matter of a couple months at a rate higher than the previous three years.
In short, the entire issue is a tempest in a teapot, and the persistent focus on it at the expense of actual accountability efforts has harmed any kind of unity in getting a legitimate and fair deal for all homeowners vandalized by the mortgage crisis. I think DeMarco, based on his preliminary analysis, should go ahead and do the principal reductions, because the potential cost or benefit is so trivial, and even he admits it would lower re-default rates. But that doesn’t mean it should ever have been the only housing policy discussed in progressive circles for the last month.