DeMarco’s New Excuse for Avoiding Principal Reduction is a Red Herring
Washington, DC—(ENEWSPF)—March 26, 2012. Mounting pressure on President Obama to fire FHFA Acting Director Ed DeMarco has forced DeMarco to shift to a new defense. Community and online groups, Congress members, and federal and state officials have called for DeMarco’s removal unless he drops his ideological opposition to principal reduction.
In an interview with the Financial Times yesterday, DeMarco introduced another red herring, trying to make the case that reducing principal for underwater homeowners with Fannie Mae and Freddie Mac mortgages would “be a windfall for the big banks.”
Big banks should be forced to face reality and write off their second mortgages as well as write down their firsts. But the Obama Administration must demand that DeMarco use his bully pulpit to force that action in part by opening Fannie and Freddie to principal reductions and using his position to make the banks write off their seconds, not hide behind faux-concern as an excuse to once again do nothing.
“We would welcome an ally who is committed to reining in big bank power, pushing for big bank executives to be criminally prosecuted and requiring that banks provide principal reduction to underwater homeowners across the board. But DeMarco isn’t interested,” said Liz Ryan Murray, Policy Director of National People’s Action, an organizational member of The New Bottom Line. “This is the moment that President Obama can demonstrate his commitment to millions of homeowners and rebuilding our economy by pushing DeMarco to move on principal reduction or by replacing him with someone who will, and by ensuring a serious federal investigation into big bank fraud that will lead to accountability for big banks and a minimum of $300 billion in principal reduction.”
Four major points underscore why principal reduction for Fannie and Freddie’s underwater mortgages helps homeowners, is good for taxpayers and rebuilds our economy.
1) Principal reduction will save taxpayers by decreasing the chances that a homeowner will default and go through the expensive process of foreclosure. This is the consensus of economists from across the political spectrum, respected analysts like Moody’s, and even Fannie Mae’s and Freddie Mac’s own economists. Propublica and NPR reported just last week that technical staff from Fannie and Freddie told DeMarco that principal reduction was good economics and would save taxpayer money.
2) Most of the models for principal reduction involve the homeowner and the investor sharing in any increase in value of the property, which increases the incentive for investors to modify mortgages and decreases concerns of a rash of strategic defaults.
3) While it is right to argue that allowing the banks to maintain their second mortgages in the face of a first mortgage write-down is not just, this misses the fact that the majority of underwater Fannie and Freddie borrowers do not even have a second mortgage.
4) Because Fannie Mae and Freddie Mac are so big – they own or guarantee more than one-half of all residential mortgages in America – they set the standards for the whole mortgage market. If DeMarco ended his stubborn opposition to any principal reduction, it would help make this practice much more widespread, which would help stabilize housing values.
Americans are justly angry at the mess created by Wall Street big banks. The bottom line is that principal reduction prevents unnecessary foreclosures, allows people to rebuild their lives and their communities, and with regard to Fannie and Freddie, can save taxpayer money.
The New Bottom Line is a growing movement fueled by a coalition of community organizations, congregations, and individuals working together to challenge established big bank interests on behalf of struggling and middle-class communities. Together, we are working to restructure Wall Street to help American families build wealth, close the country’s growing income gap and advance a vision for how our economy can better serve the many rather than the few. Coalition members include PICO National Network, National People’s Action (NPA), Alliance for a Just Society, and dozens of state and local organizations from around the country.