Surprisingly, Mel Watt is not forgiving principal on underwater loans
In apparent recognition that principal reduction is a bad idea, Mel Watt is not forgiving debts on underwater loans owned by the GSEs.
Principal reduction is the worst policy option. The economy is weighed down by excessive mortgage debt, causing borrowers to pay money to lenders that would otherwise be spent on goods and services stimulating the economy. The proper macro-economic solution suggests removing this debt would boost economic growth, but how should this be accomplished? There are two options: (1) foreclosure and bankruptcy, and (2) widespread principal forgiveness. Advocates on the political left want to see principal forgiveness. Conservatives, on the other hand, point to the problems of moral hazard, the central issue in the housing bust.
Every decision we make in life has consequences. If we save regularly and invest wisely, the consequences are wealth and peace of mind. If we spend foolishly and speculate wildly, the consequences are periods of feast and famine, delusions of grandeur, enormous entitlements, and when times are tough, unbearable stress. Positive results come from good decisions and visa versa. That’s how people distinguish wise from unwise and learn to make decisions to achieve positive and desirable ends. When people do not endure the negative consequences for their poor decisions, they come to regard their poor decisions as wise ones, and they repeat the same mistakes.
Bailouts by their nature create moral hazard. The purpose of a bailout is to prevent an individual or family from enduring the consequences of their bad decisions. It simply is not possible to have a bailout without moral hazard, it’s only a matter of degree. If widespread principal reduction became common policy, borrowers would respond by borrowing and spending recklessly because they know they will get their debts forgiven. At that point, it becomes free money for the taking — with you, the taxpayer, paying the bills.
Lenders and loan owners have problems. Lenders made loans their borrowers can’t repay, and now both parties to the deal are turning to the US taxpayer for a bailout. Somehow, these two groups have convinced themselves they deserve some of my money. I was not a participant in their transaction; I did not sign on to the risks and rewards of the deal they made, yet both groups feel I should be compelled to bail them out. Screw them both. Their problem is not my problem.
Excessive debt is a problem, but rather than widespread principal forgiveness, there is another solution in the system: foreclosure and bankruptcy. Both parties to this private financial transaction want to avoid the consequences of foreclosure and bankruptcy because it will cost banks their money and borrowers their houses and their credit. They want the taxpayer to pick up the tab.
I was greatly concerned when Mel Watt took over the GSEs that he would loot the GSEs for political gain by forgiving mortgage principal. Perhaps he understands moral hazard after all because so far he has resisted calls to forgive mortgage principal on GSE loans.
By Dina ElBoghdady July 26
After 20 years in their house, Jaime and Juana Coronel lost it to foreclosure when Jaime’s landscaping work dried up in the recession and the couple fell behind on payments.
If these people lived in their house for 20 years, why isn’t their mortgage nearly paid off? About half way through the article, you find out they owed $452,000 on a modest house they’ve owned for 20 years. They likely HELOCed over $300,000 out of the property to have such a large mortgage. Does anyone think forgiving principal for borrowers like these is a good idea?
As the eviction process dragged on, the Coronels regained their financial footing and wanted to buy the house back from its new owner, Fannie Mae. The mortgage finance firm was eager to offload the modest ranch house in a working class suburb just east of Los Angeles.
“We asked, ‘Why don’t you sell it to us?’ ” Juana said. …
Perhaps because they are deadbeats, and we shouldn’t be giving loans to people who’ve proven they can’t manage mortgage debt.
One of the most effective ways to ward off foreclosure in such cases is for lenders to reduce the size of the loans. Policy makers and many of the nation’s largest banks reluctantly have come to embrace this type of debt relief — called principal reduction.Buy-back arrangements like the one the Coronels requested amount to a principal reduction. The couple is asking Fannie to sell them the home at its current market value, which essentially would leave them with a smaller mortgage and lower monthly payments while positioning them to build equity if home values rise.
Now that Melvin Watt is in charge, all eyes are on him.Toward the tail end of his two decades as a North Carolina congressman, Watt pushed for targeted principal reduction for underwater homeowners. But he’s been silent on the issue since taking the FHFA post in January, except to say he’s studying it. Watt, a Democrat, downplayed his previous support for such debt relief when pressed about it during his Senate confirmation hearing.
“You’ve got to understand that I was a member of Congress representing my constituents, many of whom were underwater, and advocating for relief for them,” Watt said. …
In other words, he was pandering to his constituencies.
When I read that statement, I felt a huge wave of relief because it tells me he isn’t going to reduce principal.
After losing their home in 2010, Fannie agreed to let them rent the property. Jaime had retired by then, and the couple tapped his union pension to pay the rent, which was $430 less than their $2,180 monthly mortgage payment, they said.
Fannie Mae allowed them to stay in their home and cut their payment by almost 25%. Sounds like a good deal.
Three years later, when Fannie wanted to sell the house, it moved to evict the couple. That’s when the Coronels approached the company about buying it back. They were pre-qualified for a loan that they could afford given Jaime’s pension and the Social Security checks they receive, Juana said.
Fannie agreed to sell it to them — for $452,000, the amount they owe on their loan. (They owe this much in part because they refinanced into what they now recognize were abusive lending terms, they said.)
That is the worst excuse I’ve ever seen offered up. Notice how the reporter put that in hoping to arouse left-wing partisans without delving into the issue of how they borrowed and spent several hundred thousand dollars through excessive mortgage equity withdrawal.
But the home is worth about $260,000, said Peter Kuhns, an organizer at the Alliance of Californians for Community Empowerment, a grass-roots group funded with dues from members, including the Coronels.
Fannie’s offer made no sense, Kuhns said. It refused to sell the home to the Coronels for the same price it would ask of anyone else,
They won’t sell it back to them because it amounts to a $192,000 gift of principal reduction.
including Wall Street firms, he added. “What often ends up happening is big Wall Street-backed investors come in, buy the property and turn it into a rental,” he said. “How does that help the local economy or the neighborhood?”
Notice more pandering to left-wing readers who bash Wall Street investors and renter neighborhoods. Shameless.
So the Coronels, who have yet to be evicted, pushed back.
In June, Fannie offered to modify their mortgage and shave the amount they had paid in rent off the loan. Watt even weighed in, and urged the couple to keep working with Fannie. But, he emphasized, a principal reduction is off the table.
Mr. Watt, I take back everything bad I wrote about you. Your stance makes you a hero in my eyes.
“While we continue to study this issue carefully, at this time neither Fannie Mae nor Freddie Mac offer principal reduction in the form of a discounted payoff for a new refinance or as a component of a modification,” Watt wrote in a letter e-mailed to Kuhns. …
Watt did not stake out the agency’s position on that front.
Rather it was his predecessor Edward J. DeMarco, who concluded that the potential benefit of principal reductions was “too small and uncertain relative to the known and unknown costs and risks.” DeMarco said rewriting valid contracts to lower the amount of a loan could spook investors who own the mortgages and encourage homeowners to game the system.
Yes, it would encourage homeowners to game the system, and the cost to the taxpayer would have been enormous.
Ed DeMarco saved the taxpayers billions of dollars with his unpopular stance, and he lost his job because of it. It’s pleasantly surprising to see Mel Watt continue this policy.
The fear was that such relief would be costly for taxpayers, who had already ponied up billions of dollars to bail out Fannie and Freddie after the government seized them at the height of the financial crisis. …
Now that Watt is in, housing advocates want action.“It doesn’t have to take any longer than it’s already taken to reverse what we’ve known is a destructive policy,” said Kevin Whelan, national campaign director for the Home Defenders League. “This is a specific policy that really can be changed quickly,”
Yes, it could have been changed quickly’; in fact, I expected an announcement within weeks of Mel Watt beginning that the policy was being changed. The fact that the policy hasn’t been changed, and that Mel Watt openly supports it is a great sign that it may not change at all.
Principal reductions climbed steadily after that, peaking at a 20 percent share of all the mortgage help that troubled borrowers received in December 2012, Goodman said. They started to trail off last year as home prices climbed and fewer borrowers were underwater.
Rising home prices make principal reductions unnecessary. Of course, flatlining home prices may increase pressure on Watt to do something, but delaying implementation makes the policy appear less needed, which is a good thing.
Still, there are about 1.6 million more foreclosures than is typical in a healthy market, so it makes sense for FHFA to allow for limited and well-targeted principal reductions, especially in communities with deep-seated problems, said Mark Zandi, chief economist at Moody’s Analytics.
“Everyone involved is becoming much less rigid about this,” said Mark Zandi, chief economist at Moody’s Analytics. “People are feeling more relaxed about going down this path, and other loan modification programs are moving in that direction.”
Mark Zandi proves he is a clueless shill over and over again.
I was very critical of the appointment of Mel Watt to head the FHFA where he controls the GSEs. I was very concerned he would rip off the US taxpayer to help his cronies on the political left. Based on his actions so far, it appears my concerns were unfounded. So far, Mel Watt has refused to reduce principal balances, and his slow moving silence on this issue tells me he may not do so. If he continues with Ed DeMarco’s policies of not forgiving principal, Mel Watt may turn out to be a most pleasant surprise.