In what can only be described as the best decision of the housing bust a from regulator, Federal Housing Finance Agency’s head Edward DeMarco said there will be no principal reduction on Fannie and Freddie loans. He will be loudly criticized, particularly from left-wing panderers, but Mr. DeMarco understands that Moral hazard is the central issue in housing bust, and giving away free money to loan owners is never a good idea. Millions of loanowners will be crushed by this news. Everyone who doesn’t want to see their tax dollars squandered to bail them out will rejoice.
By Rachelle Younglai — WASHINGTON | Tue Jul 31, 2012 5:41pm EDT
(Reuters) – The top housing regulator rebuffed a plan by the Obama administration to cut mortgages held by struggling homeowners, a blow to the White House which is keen to show voters it can help fix the housing market.
I don’t see how this is a big blow to the Obama Administration. It isn’t like Romney was out saying principal reduction is a good idea. This may anger some on the extreme left, but those people were going to vote for Obama anyway. I rather doubt swing voters in the middle are going to vote for Romney because they believe he will endorse forgiving the principal balance on their mortgages.
The regulator for government-run housing finance giants Fannie Mae and Freddie Mac said on Tuesday that using taxpayer-funded bank bailout money could encourage defaults and not make a big improvement in reducing foreclosures in a cost-effective way for taxpayers.
“The anticipated benefits do not outweigh the costs and risks,” said the Federal Housing Finance Agency’s head Edward DeMarco, who has come under intense pressure from the government to agree to the plan.
He is absolutely correct. It’s more cost effective to take a big loss on 10% of the portfolio rather than a somewhat smaller loss on 100% of it.
The regulator’s decision drew an immediate rebuke from the Obama administration and Democratic lawmakers. Treasury Secretary Timothy Geithner disputed the agency’s conclusions and urged DeMarco to reconsider his decision.
Although the housing market has shown signs of recovery, about 11 million homeowners owe more than their properties are worth and the Obama administration has struggled with various taxpayer-funded programs to keep people in their homes.
“I do not believe it is the best decision for the country,” Geithner told DeMarco in a letter released to the media.
The use of targeted principal reduction would “provide much needed help to a significant number of troubled homeowners, help repair the nation’s housing market and result in a net benefit to taxpayers,” he said.
Geithner pointed out that DeMarco’s own data showed that the program would help nearly half a million homeowners and save taxpayers as much as $1 billion.
The housing regulator responded saying that figure only applied to a group of homeowners that had not made a mortgage payment in a year and would assume all those borrowers would win a mortgage writedown — a scenario deemed unlikely.
Rather, DeMarco’s analysis showed that the projected net benefit to taxpayers would be $500 million in the best case scenario and its experience has shown that the likelihood of successfully modifying mortgages was small.
The scholarly paper at the center of this controversy was put out by people with an agenda. DeMarco’s analysis is much closer to reality. The squatters who are deeply underwater are committed to squatting until foreclosure pushes them out. If you reduced their principal a little, it’s not likely they would suddenly start dutifully making their payments.
The administration has pressed DeMarco to allow Fannie and Freddie to do more principal writedowns. But DeMarco has maintained that this would needlessly drive up the costs of their taxpayer bailout.
Fannie and Freddie, which have received $190 billion in rescue funds to stay afloat, were seized by the government in 2008 amid threats of insolvency due to losses on subprime loans.
Although the regulator found that using the taxpayer bailout funds could result in about 74,000 to 248,000 borrowers being eligible for the mortgage reductions, it said “nearly all of this benefit is simply a transfer from taxpayers” and would rack up the tab for the public.
Implementing the program “would actually increase taxpayer costs,” said DeMarco.
This is a free-money giveaway to those who least deserve it. I am surprised and very relieved that DeMarco is taking such a strong and unpopular stand.
After spending six months studying whether to use the taxpayer funds, DeMarco’s agency concluded that the program would not only be costly and time-consuming to implement but could also send the wrong message to troubled borrowers who might choose to default to win a mortgage reduction.
It’s isn’t that this program “could” send the wrong message. It certainly “would” send the wrong message. People respond to incentives. Anyone who keeps paying their mortgage gets nothing while those who quit paying their mortgage get offered free money. What do you think would happen?
The Obama administration wants to use money from the $700 billion Troubled Asset Relief Program to pay Fannie and Freddie as much as 63 cents for every dollar of mortgage debt they forgive.
Democratic lawmakers blasted the FHFA’s decision.
“It is incomprehensible that Mr. DeMarco would reject the chance to save up to a billion dollars in taxpayer funds while helping nearly half a million homeowners stay in their homes,” said Representative Elijah Cummings.
It’s incomprehensible to me that anyone would want to see politicians give away their tax dollars to loanowners.
The housing bust has left little for us to cheer about, but today is a major victory. Principal forgiveness for the least deserving is not forthcoming.
One of the worst cases of HELOC abuse I have ever documented
I’ll spare you the daily pontification on the evils of HELOC abuse. This one speaks for itself.
- The property was purchased on 3/1/1994 for $1,060,000. The owners used a $742,000 first mortgage and a $328,000 down payment.
- On 12/14/1995 they obtained a stand-alone second for $301,031 and withdrew most of their down payment.
- On 1/13/1999 they refinanced with a $1,287,000 first mortgage.
- On 6/9/2000 they obtained a $215,000 HELOC.
- On 10/19/2001 they refinanced with a $1,500,000 first mortgage.
- On 1/22/2003 they refinanced with a $2,000,000 first mortgage.
- On 3/31/2003 they obtained a $100,000 HELOC.
- On 3/24/2005 they refinanced with a $2,336,000 Option ARM from Washington Mutual.
- On 8/3/2005 they obtained a $250,000 HELOC.
- On 10/17/2006 they opened a $500,000 HELOC.
- On 10/12/2007 they obtained a $1,000,000 HELOC from Bank of America. A million dollar HELOC backing an Option ARM. BofA deserves to lose everything on that one.
- Assuming they maxed out the HELOC — and based on their previous borrowing behavior, it’s safe to conclude they did — the total property debt was $3,336,000 plus accumulated negative amortization.
- Total mortgage equity withdrawal was $2,594,000.
- They quit paying in early 2009. A NOD was filed on 7/30/2009. He wasn’t booted from the property until 2/21/2012, about three years later.
This family extracted over $2.5M plus they got to squat in a luxurious mansion for 3 full years. Perhaps we should forgive their principal and let them do it again?
I admit, I am jealous of this one. That’s the deal I want during the next bubble.
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Proprietary OC Housing News home purchase analysis
$2,275,000 …….. Asking Price
$1,060,000 ………. Purchase Price
3/1/1994 ………. Purchase Date
$1,215,000 ………. Gross Gain (Loss)
($84,800) ………… Commissions and Costs at 8%
$1,130,200 ………. Net Gain (Loss)
114.6% ………. Gross Percent Change
106.6% ………. Net Percent Change
4.1% ………… Annual Appreciation
Cost of Home Ownership
$2,275,000 …….. Asking Price
$455,000 ………… 20% Down Conventional
4.05% …………. Mortgage Interest Rate
30 ……………… Number of Years
$1,820,000 …….. Mortgage
$467,687 ………. Income Requirement
$8,742 ………… Monthly Mortgage Payment
$1,972 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$569 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$800 ………… Homeowners Association Fees
$12,082 ………. Monthly Cash Outlays
($1,497) ………. Tax Savings
($2,599) ………. Equity Hidden in Payment
$645 ………….. Lost Income to Down Payment
$304 ………….. Maintenance and Replacement Reserves
$8,935 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$24,250 ………… Furnishing and Move In at 1% + $1,500
$24,250 ………… Closing Costs at 1% + $1,500
$18,200 ………… Interest Points
$455,000 ………… Down Payment
$521,700 ………. Total Cash Costs
$136,900 ………. Emergency Cash Reserves
$658,600 ………. Total Savings Needed
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