Anyone who has read my writing before knows I don’t think principal forgiveness is a good idea. I believe principal forgiveness is the worst policy option because foreclosure Is a superior form of principal reduction.

I don’t think I am being cynical when I say that the Obama administration is pushing principal forgiveness in an attempt to buy votes. Any economic benefit the policy may have is outweighed by the moral hazard it creates and the unfairness of the distribution of benefits. The most irresponsible borrowers obtain the greatest benefit from this policy. By rewarding them and buying their votes, we are letting the Ponzis take over. If we let the Ponzis run our political system, we will all be subsidizing their spending through our tax dollars forever. Politicians should just say no.

HUD’s Donovan: Fannie, Freddie Should Embrace Loan Forgiveness

By Nick Timiraos — February 16, 2012, 4:27 PM

The Obama administration would like the federal regulator for Fannie Mae and Freddie Mac to begin reducing loan balances for certain troubled borrowers, a top official said Thursday.

“More and more economists across the political spectrum are recognizing [principal reduction] is a critical step,” said Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development, in an interview with The Wall Street Journal. “If a family is in their home for 10, 15 years and has no hope of being able to build equity again, they’re going to give up at some point.”

Donovan’s argument is trying to generate sympathy, but it is completely disingenuous. If it has been a family home for 10 or 15 years, they should not me underwater. Even in Las Vegas where the median home prices has rolled back 15 years, owners who bought in the 15 years ago with a fixed-rate and conventional amortization have paid down their mortgage to where they are not underwater. The only people who bought 10 to 15 years ago anywhere in the United States who are currently underwater were HELOC abusers who added to their mortgage. Those are the people least deserving of principal reduction. Giving the Ponzis money is the worst form of moral hazard imaginable. If you give Ponzis free money, they will ask for it again guaranteed.

Officials have said for more than a year that they’d like to see mortgage giants Fannie and Freddie adopt principal reduction, and several steps in recent weeks have put more pressure on the Federal Housing Finance Agency, the firms’ regulator, to approve write downs.

“Clearly it’s an important piece of the puzzle that Fannie and Freddie move forward on this,” said Mr. Donovan. Last month, the White House said it would triple incentive payments under an existing loan-modification program that subsidizes the cost of loan forgiveness and that it would offer them to Fannie and Freddie.

Clearly principal reduction not an important piece to the puzzle, and claiming otherwise is complete bullshit. Perhaps Obama thinks he can buy a few votes, but it won’t endear him to people like me who will pay the bill and obtain no benefit.

When the principal reduction program was rolled out two years ago, those incentive payments weren’t extended to Fannie and Freddie, and their regulator has said there are less costly ways to help borrowers avoid foreclosure. The firms are being propped up with massive taxpayer infusions of their own, and the FHFA is tasked with preserving the firms’ assets.

By providing new taxpayer funds, the administration is making it harder for the FHFA to maintain its stance that principal reduction is less costly because Treasury funds will effectively subsidize some of those losses. The FHFA has said it is currently evaluating the newest proposal.

WTF? If the taxpayer is paying the bill, that makes it okay? Providing taxpayer funds makes it more outrageous. That isn’t free money.

The firms are “working right now…to make a decision on whether they are going to begin principal reduction,” said Mr. Donovan. “We certainly hope that they will start to do that based on these incentives. That’s why we made them available.”

Separately, Mr. Donovan said he remained “concerned” about the prospect of taxpayers being forced to backstop losses at the Federal Housing Administration.

OMG! What a hypocrite! He is telling the GSEs to take taxpayer free money and give it to loan owners, but he is concerned about taxpayer losses at the FHA? Give me a break.

Budget projections this week showed that the agency could deplete its reserves this year. The FHA, which doesn’t make loans but instead insures lenders, has played a critical role supporting housing markets amid a sharp pullback by the rest of the market.

Notice the public relations justification for the FHA bailout has already begun.

The agency could announce within days its plan to increase the premiums charged to borrowers in order to build up its reserves. HUD also announced in recent days settlements with two of its biggest lenders over fraudulent loan claims that will net more than $680 million for the agency.

But Mr. Donovan warned of precipitous actions to boost reserves that limit the availability of credit and undermine fragile housing markets. “This is a delicate balancing act because if we go too far…what we’re going to be doing is stalling the momentum that we have in the housing recovery,” he said. “Frankly, that not only hurts homeowners more broadly in the housing market, it hurts FHA because the value of our existing investments goes down.”

FHA insurance premiums will go up, and the bailout will still be massive. The increased premiums will put more pressure on low-end pricing where FHA financing is dominant.