The Federal Housing Finance Agency, the entity that oversees Fannie Mae
and Freddie Mac,
recently released a study demonstrating that principal reductions for underwater homeowners would
have a significant, positive effect on the housing market. The study also
found that principal reductions would ultimately save American taxpayers
$1 billion because borrowers would stay in their homes and continue to
make payments, rather than default and leave those homes.
Even though his own agency released this study, FHFA Director Ed DeMarco
stated on Tuesday that he would not authorize Fannie or Freddie to issue
principal reductions, citing to the moral hazard and taxpayer risk created
by such a program.
Secretary of the Treasury Geithner stated that DeMarco's decision was
not the best decision for the country. I tend to agree with Secretary
Geithner here. Principal reduction would go a long way towards easing
the pain in the local housing market, particularly in Chicago where property
values remain depressed.
What's more, we are seeing more principal reductions from lenders like
Chase. If major servicers/lenders see the benefit to their bottom line,
there is likely one for taxpayers as well. The only way to change the
situation for homeowners whose loans are held by Fannie and Freddie would
be to replace DeMarco. Unfortunately, in an election year with a partisan
and gridlocked Congress, it is highly unlikely that a replacement could
get confirmed by the Senate.
In the meantime, we'll have to continue to pursue
creative solutions to the problem of foreclosures and underwater properties.