My hero, Ed DeMarco, is on his way out as head of the FHFA that runs Fannie Mae and Freddie Mac, the GSEs. Ed DeMarco is a tragic figure who showed how difficult it is in Washington to do the right thing (see: Head of GSEs Edward DeMarco faces replacement, unfortunately). His actions in looking out for the best interests of taxpayers put him in the firing line of pandering politicians on both sides of the aisle. The left assailed him for refusing to give free money to loan owners. His opposition to principal reduction prevented politicians from buying votes with taxpayer money. The right wanted him removed because he vigorously pursued banks for buy-backs on the bad loans they wrote. The too-big-to-fail banks that donate heavily to right-wing politicians didn’t want to face the repercussions for their actions. With both the left and the right opposed to his actions, it was only a matter of time before Congress found a milquetoast replacement palatable to both sides.
Mark Zandi is being considered for the job of Ed DeMarco’s replacement. The Wall Street Journal has an excellent article reviewing Mark Zandi’s positions on key housing issues by looking through quotes from recent public appearances. It should give us a fair indication of how he would act if he gets the job.
By Nick Timiraos — April 15, 2013, 9:52 AM
If the White House nominates economist Mark Zandi as the director of the regulator that controls Fannie Mae and Freddie Mac, there shouldn’t be too many surprises about what Zandi thinks about housing finance.
That’s because Zandi has been one of the most frequently quoted economists since the housing boom turned to bust. He’s a regular presence on cable television news shows, the industry panel circuit, and Capitol Hill testifying before lawmakers.
Zandi, who The Wall Street Journal reported on Friday is under consideration to run the Federal Housing Finance Agency, has been an early and outspoken advocate for more aggressive action to stem the foreclosure crisis,
championing efforts to boost refinancing and to force banks to write down mortgage principal.
Foreclosure Is a Superior Form of Principal Reduction. Mark Zandi is wrong on the two most important issues in housing. His positions will be more politically popular for sure, but he will not protect the taxpayers. The left will like him because he wants to give them free money, despite the obvious problems with moral hazard. The right will like him because he wants banks to keep kicking the can rather than reduce American’s debt burdens through foreclosure.
He also endorsed a bankruptcy overhaul known as “cram-down,” in which judges would be allowed to write down mortgage debt.
Judges shouldn’t be able to write down mortgage debt. If a debtor doesn’t want to pay a particular debt, they should give up the asset secured by that debt.
So far, Mark Zandi is 0 for 3.
Zandi has argued for the government to replace Fannie and Freddie with a public-private hybrid system whereby the U.S. would provide catastrophic risk insurance for certain loans, but he’s also advocated for the government to revisit how much it invests in housing. Here’s a look at some of Zandi’s public positions on housing over the past few years.
On the need to start housing-finance reform (February 2012, Senate testimony):
It’s very important for Congress to resolve Fannie and Freddie…. As long as they remain in conservatorship, nothing good happens. Of course, you have many other moving parts that you need to nail down before you can actually resolve Fannie and Freddie. The private residential mortgage securities market is…dead in the water. And that needs to be revived before we can resolve Fannie and Freddie. But I agree…the longer they’re in this no-man’s land is a problem for everybody.
He got that one right. The GSEs need to be wound down and replaced by an insurance fund. Since we already have this fund in the form of the FHA, the GSEs have no reason to exist at all.
On the future profitability of Fannie and Freddie (October 2012 think tank panel discussion):
They’re making a boatload of money, and in fact that’s going to be a problem: they’re going to make so much money that… [people won’t want to] get rid of them. It’s coming. You can feel it.
Since the GSEs are $150 billion in the red, they will need to make a boatload of money for a long time to make the taxpayer whole again.
On the government’s response to the housing bust (August 2010, Treasury summit):
It’s clear that if government, the [Federal Housing Administration] in particular, had not stepped in to the degree that it had, the housing crash and recession would have been measurably worse. As it was, it was serious. It’s been very serious. It’s ongoing. House prices are down 30% from their peak…. But I think it’s very easy to say that the price declines, the foreclosures, the hit to the economy would have been measurably greater without the ability of the FHA and government more broadly to enter into the market as aggressively as it did.
His statement is accurate, but the desirability of all this manipulation depends entirely on your point of view. Bankers and homeowners think all this theft from renters is a great thing. Renters who are paying attention aren’t so thrilled. Renters are being forced to pay for the bad actions of private parties entering into private contracts, and no benefit comes back to renters for doing this.
On the government’s future role in the housing market:
The government’s role in housing needs to be pulled back quite significantly, certainly compared to where it is today, but also compared to where it was prior to the crisis. And I’m not arguing this year or next. The void is still quite large. The private market is dormant.… And so the government can’t exit out now. But longer run it is very important for the government to reduce its place in the housing market.
Most people agree on this point, but the lobbyists for realtors and homebuilders will strongly resist any reductions in their subsidies.
On supporting affordable housing:
This is going to be more important going forward, because lower income households are frankly under more financial stress than they’ve ever been. And that’s not going to change. In fact, it probably will get worse going forward. And they will not have access to housing—which is not a luxury, it’s a necessity—without government help.
It’s worth pointing out that we wouldn’t have a problem with affordable housing IF THEY JUST LET HOUSE PRICES FALL.
Now of course that doesn’t mean necessarily a single family home. And I think we’ve not paid close enough attention to rental housing, and the advantages of that. Not everyone can or should have a single family home. And I think government should think more clearly about how it can help with respect to rental housing.
I think the government should think more clearly how it can get out of helping with any kind of housing. How much government “help” do we need?
On the causes of the financial crisis (January 2010, Financial Crisis Inquiry Commission testimony):
[W]hat is the root cause of this mess? And my answer is there are many—it’s a mélange of problems. But three things—first is the glut of global saving, which provided the fodder for all this lending.
The Savings Glut is a myth. We had two problems that combined to make investors chase yield into mortgages. First, securitization “liberated the equity” from any available stream of cashflow. Once this money was freed up, it needed a new place to go. This wasn’t savings. It was the result of excessive securitization. Second, the federal reserve lowered interest rates so much that all investment returns declined. The need to chase yield required investors to aim lower and lower. Eventually, they took dead aim and residential mortgages.
Second was the failure of the process of securitization. The intent of securitization was to take all this global saving and funnel it into good loans, and it failed to do that. And there are a lot of bad actors in that process.
The securitization that did occur was directed into horrible loan products based on bad ratings from companies like Moody’s that Zandi works for!
And then third was the regulatory failure. There was no regulatory oversight… The key regulator is the Federal Reserve. It failed in that process.
On that much we agree.
On Fannie and Freddie’s role in the mortgage crisis (January 2012, Washington Post):
Despite Fannie and Freddie’s role in the panic, it is wrong to blame them for creating it; that distinction belongs rightly to the private mortgage market. Understanding this is critical to creating a stable, efficient mortgage finance system for the future. While Fannie and Freddie themselves deserve to pass from the scene, given their numerous past missteps, it is equally clear that the government needs to remain an important player in housing finance, providing consistent regulatory oversight and a backstop in case the private market collapses again.
He is right on this issue. The GSEs were not responsible for the housing boom or bust. The political right likes to blame them because they want to see them disbanded, but the reality is that these entities did not create the boom or the bust.
On providing more aggressive housing aid through Fannie and Freddie (February 2012, Senate testimony)
The principle goal of the conservator should be to preserve taxpayer money, right? I mean, we’ve anted up $160 billion for Fannie and Freddie. And this is getting to be very costly. And I think it’s prudent that the regulator focus on that. But in that context, I think there’s many things that can and should be done. I think, for example, mortgage refinancing, facilitating more mortgage refinancing, it perplexes me why FHFA isn’t being more aggressive here in trying to promote that activity….
On the decision by Fannie and Freddie not to engage in limited principal forgiveness:
I am perplexed—I have my models and I look at this data very carefully—with the argument that Fannie and Freddie don’t believe in principal write-down. They believe in principal forbearance. Well, you know, under some circumstances, under reasonable assumptions, principal write-down works better than principal forbearance. And just to completely say, ‘We’re not going to have any principal write-down in a targeted way, so we don’t have more hazard issues,’ I understand that. I think that’s just a step too far. So I, as you can see from my voice, I’m frustrated. I’m frustrated by it.
Clearly, he doesn’t understand moral hazard issues, or he wouldn’t be frustrated with DeMarco’s decision to do the right thing.
When economists make financial models, they make certain assumptions. The models that show principal reduction saves the GSEs money all assume forgiving principal won’t cause borrowers to change their behavior in ways that causes even more losses. Common sense says otherwise. Zandi is frustrated because he believes his models reflect reality when they don’t. Plus, saying he’s frustrated plays well with the political left who wants to give free money to loanowners to buy votes.
On the 30-year fixed rate mortgage (October 2012, panel discussion)
You want the interest rate risk in the financial system. You don’t want it in households.
Yes. There’s an issue I agree with him totally on.
It’s a more efficient system and ultimately to the benefit of everyone and you can manage it better in times of crisis as we saw during the Great Depression. The 30-year fixed rate mortgage is a good product. It makes our system better. We can price it properly…. It should not be subsidized. The catastrophic government guarantee should be properly priced—actuarially, fairly priced. The FDIC does it with deposit insurance—they’ve done it right. We need to design it so that if things goes badly … and the government misprices the risk, there’s clawback provisions just like the FDIC. If they can’t cover the deposit insurance fund, they can go back to the banking system and say, ‘Listen, you’ve got to ante up and cover the losses.’
On the mortgage interest deduction:
It’s pretty straight forward: you want to eliminate the [mortgage interest deduction] on second mortgages, on vacation homes, and maybe scale it back for high end homes.
More broadly, I don’t think the MID helps the housing and mortgage industry as much as the industry thinks it helps them. I mean, at the end of the day, it probably jacks up house prices in some markets by 5%-10%. I don’t think it’s much more than that. If you slowly … phased it out over time, the impact on the industry would be not meaningful…. And I do think that it’s costly. It’s $100 billion a year.
realtors, lenders, and homebuilders will lobby for this subsidy even if it has little positive impact because it’s free money to them. Any subsidy is better than no subsidy at all if you’re on the receiving end of things.
We need to fix our fiscal issues…. And I would say to the industry, no industry is going to get hurt more if we don’t address those fiscal issues because it’s going to result in higher interest rates and this industry is going to get creamed….
Obviously, realtors, lenders, and homebuilders don’t get this.
You ask almost any economist what they think — whether the MID really is a benefit to the housing and mortgage market and the economy — and you won’t find many saying yes. And one reason why economists believe this is they look across the globe and they ask where is the evidence this is really that helpful to the housing market—in transactions, homeownership rates? You don’t find the evidence. …
On the need to prevent foreclosures from taking longer (March 2012, Washington Post):I’ve long advocated slowing foreclosures to ensure homeowners are treated appropriately, and of managing the process so it doesn’t cripple the financial system, housing market and economy.
In other words, he wants to pander to both loanowners and banking interests and prolong a crisis that should have been resolved long ago.
But now it’s time for the courts to accelerate their efforts to work through their backlog of foreclosure-related cases, for regulators to pressure mortgage servicers to quickly implement the foreclosure process changes they have already agreed to, and for state and local governments to reevaluate the complex mediation efforts many have put in place. For the benefit of homeowners, their communities and our economy, it’s time to move on.
So it took extending foreclosure timelines to three years or more for him to finally say enough is enough? I guess everyone has a breaking point.
There are other issues related to housing were Mark Zandi has been wrong. As Calculated Risk pointed out: Analysis: Mark Zandi wrong about housing tax credit. Zandi thought the housing tax credit was a good idea. It was a dismal failure for many obvious reasons.
Mark Zandi would not be my first choice to replace Ed DeMarco. Personally, I would like to see DeMarco stay on. He’s been doing a great job (See: DeMarco prepares for final shutdown of GSEs). Zandi will likely get the job as his positions pander to both sides of the political spectrum better than DeMarco has. Unfortunately, in his pandering, he will not protect the US taxpayer, which is the primary responsibility of the job.
Zandi vs. Schiff
Another Option ARM flameout
The Option ARM was the loan primarily responsible for the housing boom and bust. Option ARMs allowed borrowers to get loans double the size than a 30-year conventional mortgage, and borrowers used them to inflate house prices 100% higher than they should have been. It shouldn’t be surprising that the federal reserve had to engineer interest rates nearly 50% below the bubble so that payments on stable mortgages could support bubble-era loan balances. If interest rates were sill 6.5%, house prices would be half of what they were in 2006.
The former owner of today’s featured REO bought back in 1999, but in 2004 she refinanced with an Option ARM and extracted over $200,000 in free spending money. By early 2007 she was in trouble. She got another infusion of cash from a private party that delayed her foreclosure, but by late 2010, she was back in default. She was allowed to squat for another two years, but the bank finally put her out of her misery. The private party that loaned her $135,786 lost everything. I hope they weren’t friends because after losing that much money, they aren’t friends anymore.
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Proprietary OC Housing News home purchase analysis
$561,750 …….. Asking Price
$294,454 ………. Purchase Price
4/26/1999 ………. Purchase Date
$267,296 ………. Gross Gain (Loss)
($44,940) ………… Commissions and Costs at 8%
$222,356 ………. Net Gain (Loss)
90.8% ………. Gross Percent Change
75.5% ………. Net Percent Change
4.6% ………… Annual Appreciation
Cost of Home Ownership
$561,750 …….. Asking Price
$112,350 ………… 20% Down Conventional
3.57% …………. Mortgage Interest Rate
30 ……………… Number of Years
$449,400 …….. Mortgage
$102,174 ………. Income Requirement
$2,036 ………… Monthly Mortgage Payment
$487 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$117 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
$2,639 ………. Monthly Cash Outlays
($312) ………. Tax Savings
($699) ………. Principal Amortization
$129 ………….. Opportunity Cost of Down Payment
$160 ………….. Maintenance and Replacement Reserves
$1,919 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$7,118 ………… Furnishing and Move-In Costs at 1% + $1,500
$7,118 ………… Closing Costs at 1% + $1,500
$4,494 ………… Interest Points at 1%
$112,350 ………… Down Payment
$131,079 ………. Total Cash Costs
$29,400 ………. Emergency Cash Reserves
$160,479 ………. Total Savings Needed