Ed DeMarco, Director of the Federal Housing Finance Agency has announced that FHFA, the regulator charged with managing Fannie Mae and Freddie Mac, will not allow the two mortgage giants to write down the principal balance on tens of thousands of underwater mortgages that they currently hold.
In other words, there will be no large scale effort to change the terms of existing mortgages unilaterally, at the expense of mortgage investors or the taxpayers. The media will likely play this story as one of a powerful government regulator refusing to help "the little guy". The Obama Administration is already complaining about the decision. Treasury Secretary Timothy Geithner has already stated that he would like to see "targeted" reductions of underwater mortgages.
But DeMarco stated that the agency's own analysis of a plan to reduce the balances on existing mortgages could result in more than 200,000 "write-downs" costing billions of dollars in losses for taxpayers.
The FHFA Director cites analysis which indicates that the benefit to be gained by writing down mortgage principal is very little when compared to the real costs of such an undertaking. He is adamant that his choice, while tough and certainly unpopular for him, is the right one for the taxpayers. And right or wrong, I applaud him for that. We need more regulators with the guts to stand up to politicians, when it comes to protecting the taxpayers.
It's a tough situation for DeMarco to be in, but he truly feels that he is doing what is best under the FHFA mandate. The Treasury has offered to help make up some of those losses out of TARP funds that are supposedly still available, (sitting in a box somewhere in Tim Geithners office I guess).
But targeted mortgage write-downs available only to a fortunate few who happen to have a mortgage owned by Fannie or Freddie is a small band-aid on a very big problem. And given the over all size of the U.S. housing market, even a couple of hundred thousand mortgage write-downs would not have any long term positive impact on the housing market in general. But there would be a tremendous cost as these mortgages are guaranteed and the loss would have to be paid.
By making this tough decision, DeMarco is also helping preserve the long held sanctity of contract law. In so doing, FHFA is helping keep what's left of the secondary mortgage market in tact and functioning in some "normal" sense. We simply can't start changing the terms of existing, in-force mortgage contracts without risking serious damage to the secondary mortgage market.
But I believe that if the government really did understand the economics involved they would realize that the very taxpayers who have bailed out everyone else should be helped using across the board tax credits for home owners. A tax credit could reduce the burden for all homeowners in one stroke, and the process for applying it, the IRS, is already in place.
After all, those homeowners have been paying a lot in property taxes, and over the life of the ownership of a home, property taxes are one of the most expensive items paid for by homeowners, and they are the one debt against a home that can never be paid off.
Taxes add tremendously to the cost of homeownership. A reduction in property taxes, or a tax credit for homeowners could accomplish the same thing fairly and apply to all borrowers who qualified, not just those that would be reached through Fannie and Freddie. A plan to write down "targeted" mortgages while ignoring the vast majority of mortgages is typical of government short-sightedness that wants a quick, politically beneficial solution instead of one that makes sense and is better for everyone involved.
The original buyer tax credit which expired in the summer of 2010 showed how quickly housing could bounce back if the government would act to lighten the tax burden being placed on all homeowners, not just those who are underwater. Those in trouble need a break, and those who have worked to remain current deserve a break too. If we are going to come up with a plan that will really have a positive impact on the general housing market, it's got to be available to all homeowners. Reducing payments by reducing tax burdens would be a true "quick fix". And one that would benefit the taxpayers themselves.
Why not bring back the original buyer tax credit, and this time, let's add one for the owners who have stayed in their homes and stuck it out. The more underwater they are, the higher the credit they may qualify for. This would result in the most needy being able to obtain the largest reduction in ownership costs. And this plan would not infringe on the rights of investors in mortgage contracts, and mortgage backed securities.
If the buyer tax credit of 2009 - 2010 is any indication, this would produce a near immediate turn around in the housing market, as it did in 2010, until it finally ended in July of that year. Much of the data on sales activity show a real, significant bounce because of the tax credit. This translated into improvements in the general economy as well, due to the pick up in housing activity. But once the tax credit expired, so did the benefit to the economy.
DeMarco is right to draw a line in the sand. The solution to this crisis needs to be much bigger, bolder and available to all homeowners not just the "winners" of the Fannie - Freddie lottery.
Donna S. Robinson is a real estate investor, author, speaker and residential investor coach. Her website is www.RealtyBizConsulting.com Her Twitter address is @donnaconsults