May282013

Fortunately, FHFA’s Ed DeMarco Isn’t Going Anywhere

Perhaps the news of Edward DeMarco’s ouster as head of the FHFA was premature. I wrote last month that the head of GSEs Edward DeMarco faces replacement, unfortunately. The political left hates him because he won’t let them buy votes by reducing mortgage principal on their constituent’s loans. The political right was angry with him for vigorously pursing buy-backs from financial services firms that sold the GSEs bad loans (something which DeMarco has quietly stopped.) With the opposition from the political right waning, DeMarco has started to gain favor in the eyes of Conservatives who like that he isn’t willing to give out free money at taxpayer expense to benefit politicians on the left.

I’m not the only one who likes his work. Housingwire recognized Edward DeMarco as their Person of the Year in 2012. “DeMarco has shown a remarkable ability to focus on the issues that really matter, tuning out partisan political rhetoric as part of that process,” said Paul Jackson, publisher and CEO at HousingWire. “For that reason, he is our 2012 Person of the Year.”

Besides steadfastly protecting the US taxpayer, Edward DeMarco has helped lay the groundwork for the dismantling of the GSEs. He has methodically sold off the holdings of the GSEs and laid out the options for Congress to consider. Since none of the options are politically palatable right now, the only progress on the winding down the GSEs is coming from DeMarco. It’s a surprising amount of power entrusted to one bureaucrat. Let’s hope he keeps this power for a while.

Why FHFA’s Ed DeMarco Isn’t Going Anywhere

By Jason Gold — May 20, 2013

If confirmed by the Senate, Rep. Mel Watt, D-N.C., will replace Ed DeMarco, the current – and controversial – acting director of the Federal Housing Finance Agency.

What would Watt do as the new head of the GSEs? Loot its coffers to dole out money to left-wing supporters most likely.

While Democrats have been calling for DeMarco’s head for years as he has pushed back on more extreme housing remedies, Republicans have quietly supported DeMarco’s decisions.

But the president’s pick portends big changes in housing policy. After all, the FHFA is the main federal regulator overseeing housing policy, and whoever runs it will have a major impact on home ownership, mortgage lending, and the future of Fannie Mae and Freddie Mac, the two mortgage giants in federal conservatorship.

But for all the fanfare surrounding the nomination of Watt, there’s one small matter standing in the way. Though DeMarco is a holdover from the Bush administration, the current political climate in Congress means he isn’t going anywhere anytime soon.

The Republicans know Watt will loot the GSEs and implement far-ranging policies designed to get the federal government on the hook for putting people in homes who can’t sustain home ownership. Since Watt will have to survive a nomination process, and likely won’t make it, the Republicans can keep DeMarco in place by simply torpedoing the nomination of anyone they don’t like.

That’s because nominees for FHFA Director must be confirmed by the Senate. In years past, Congress routinely ratified the President’s choices. No longer. Nowadays Senate confirmations are the political equivalent of a reality TV show, in which lawmakers preen for the cameras, fight among themselves and nominees are subjected to a merciless and microscopic scrutiny of their personal lives.

In the long run, I don’t think this kind of nomination process is good for the country. Many people who might excel in public service won’t be willing to go through the nonsense just to get a government job.

But the White House isn’t exactly immune to politics, either. President Obama has taken a lot of flack for not doing enough for underwater homeowners and lacking diversity in his second-term Cabinet picks. Installing Watt, who is a minority and supports principal reduction, could help quiet such criticisms.

Watt is a good political choice for Obama, but he will likely be cannon fodder like Obama’s previous choice was.

This isn’t the president’s first attempt nominating a replacement for DeMarco. At the end of 2010, he picked Joseph Smith, Jr., then the North Carolina Commissioner of Banks. But Smith was forced to withdraw his nomination in January 2011 after Sen. Richard Shelby, R-Ala., then ranking member of the Senate Banking Committee, said he and his party would vigorously oppose Smith’s confirmation.

Likewise, Watt’s confirmation hearings are expected to be an uphill battle, particularly because he vigorously supports principal reduction, which essentially wipes away part of an existing mortgage so that the homeowner is no long underwater. Supporters of the policy argue that principal reduction reduces defaults and saves taxpayers money.

The argument that principal reduction would save taxpayers money is nonsense. The study that supposedly supports this conclusion assumes that implementing a principal reduction program won’t change borrower behavior. We all know that if the possibility for free money exists, borrowers will do whatever they can to get it, which typically means not paying the mortgage in order to qualify.

But Republicans have made it very clear that they will never back principal reduction, saying it’s akin to bailing out irresponsible homeowners and increasing the government’s debts.

Reducing principal is bailing out irresponsible loanowners. If people bought houses they can afford, even at peak pricing, then they shouldn’t need principal reduction or any other kind of bailout. The only people who need bailing out are the people who bought more house than they could afford. There is so little right or wrong in politics, but in this instance, the political left is completely wrong and the political right is completely right.

The sharp divide between Democrats and Republicans on the future of housing policy makes it a very real possibility that DeMarco will retain his post, no matter what his boss – President Obama – wants.

Good.

The prickly issue of principal reduction aside, DeMarco has actually been a steady hand at FHFA. Under his guidance, government mortgage giants Fannie Mae and Freddie Mac have gotten their financial house in order and are now posting pretty heady profits. The agency has begun to shrink the government’s footprint in the mortgage market and slowly, private lenders are starting to see some light at the end of the tunnel.

So why exactly should he be replaced?

Nobody is arguing that his job performance hasn’t been excellent. The one and only argument for replacing him is because he won’t hand out free money to loanowners to benefit politicians from the political left. DeMarco will likely survive the remainder of Obama’s second term, and I think that’s a great thing.

Credit Union gets burned

Credit unions weren’t hit hard by the housing bust. Most credit unions made plain vanilla loans and didn’t allow borrowers to exceed safe debt-to-income ratios. As a result, they lost a lot of market share and business during the great credit orgy, but during the bust, they didn’t lose their asses either.

The former owners of today’s featured property bought in 2003 and executed a refinanced in 2007 for $380,000. That was probably well below the peak value; in fact, it was probably an 80% LTV loan, but since prices fell more than 20%, the loanowner was underwater and stopped paying the mortgage.

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[idx-listing mlsnumber=”EV13093869″ showpricehistory=”true”]

7021 EL VERANO Dr Buena Park, CA 90620

$400,000    ……..    Asking Price
$309,000    ……….    Purchase Price
4/14/2003    ……….    Purchase Date

$91,000    ……….    Gross Gain (Loss)
($32,000)    …………    Commissions and Costs at 8%
============================================
$59,000    ……….    Net Gain (Loss)
============================================
29.4%    ……….    Gross Percent Change
19.1%    ……….    Net Percent Change
2.5%    …………    Annual Appreciation

Cost of Home Ownership
——————————————————————————
$400,000    ……..    Asking Price
$14,000    …………    3.5% Down FHA Financing
3.77%    ………….    Mortgage Interest Rate
30    ………………    Number of Years
$386,000    ……..    Mortgage
$102,823    ……….    Income Requirement

$1,792    …………    Monthly Mortgage Payment
$347    …………    Property Tax at 1.04%
$0    …………    Mello Roos & Special Taxes
$83    …………    Homeowners Insurance at 0.25%
$434    …………    Private Mortgage Insurance
$0    …………    Homeowners Association Fees
============================================
$2,656    ……….    Monthly Cash Outlays

($370)    ……….    Tax Savings
($579)    ……….    Principal Amortization
$18    …………..    Opportunity Cost of Down Payment
$120    …………..    Maintenance and Replacement Reserves
============================================
$1,844    ……….    Monthly Cost of Ownership

Cash Acquisition Demands
——————————————————————————
$5,500    …………    Furnishing and Move-In Costs at 1% + $1,500
$5,500    …………    Closing Costs at 1% + $1,500
$3,860    …………    Interest Points at 1%
$14,000    …………    Down Payment
============================================
$28,860    ……….    Total Cash Costs
$28,200    ……….    Emergency Cash Reserves
============================================
$57,060    ……….    Total Savings Needed
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