The Help Struggling Homeowners Need, And The Obstacle In The Way

One agency could help millions of underwater homeowners, ease the foreclosure crisis, and inject billions of 'stimulus' dollars into the economy – today.

About 11 million homeowners [1] are underwater in their mortgages—in other words, have mortgages that exceed the value of their homes—according to some financial experts tracking home values nationwide. That represents a $700 billion debt drag on the housing market and the overall economy, according to the Center for Responsible Lending.

A broad range of economists and financial experts support addressing this problem through principal write-downs, readjusting mortgage values to the actual value of the homes.

The Federal Housing Finance Agency [2]is the independent government office that oversees the functions of the mortgage finance corporations commonly known as Freddie Mac and Fannie Mae. Together, the two entities are responsible for financially backing more than half [3] of the mortgages in the country. If the FHFA directed them to do so they could issue principal reductions, negotiate lower interest rates, push refinancing deals through the system, and dramatically reduce foreclosures. That would help millions of households avoid foreclosure, stop the decline of communities plagued by foreclosure, and boost the overall economy.

But one bureaucrat is defying the Obama administration – and our best economic minds – and standing in the way of these actions.

That man is Edward DeMarco, the acting director of the Federal Housing Finance Agency. DeMarco is a career bureaucrat who joined FHFA under George W. Bush and was named acting director by President Obama in 2009. [4] President Obama has nominated a permanent director, but that nomination is being blocked by conservatives in the Senate.

The FHFA is an independent agency, so both the White House and DeMarco claim that he can't be fired. But DeMarco is still obligated to carry out his agency's mission - and to speak truthfully to his ultimate employers, the American people. (He has refused to speak with reporters or respond to press inquiries on a number of occasions.)

This Bush appointee doesn't understand – or doesn't want to carry out – his mission. Fannie, Freddie and the FHFA exist to help homeowners, not bankers.

DeMarco claims that principal reductions for underwater homeowners - some of whom are still paying seven percent interest or more for nonexistent home value, when the prevailing rate is as much as three points lower - "would not meet (the FHFA's) responsibilities as conservator of Fannie and Freddie." He told Congress that "FHFA has a statutory responsibility to preserve and conserve the enterprises’ assets [5]."

But key policy leaders [6] and economists [7] agree that principal write-downs are a key to getting the economy bank on track. Elizabeth Warren [8], who was the first director of the Consumer Financial Protection Bureau, has said it best: “We must never forget that this economic crisis began one lousy mortgage at a time. Foreclosures don’t just harm the families that lose their homes. They also have powerful effects on whole communities, depressing home values and putting a drag on local economies.” That’s why, she said, “we need a housing policy that fires on all cylinders: principal write-downs, refinancing options, cash for keys, and short sales.”

DeMarco is also being disingenuous about his mandate as FHFA acting director. It’s not just to “preserve and conserve” the assets of Fannie and Freddie. The agency’s mission is also to “support housing finance and affordable housing, and support a stable and liquid mortgage market.” It’s supposed to ensure that the housing market works for ordinary homeowners, not just Wall Street dealmakers. When those dealmakers engaged in predatory or fraudulent lending, then with Fannie and Freddie marketed those loans on Wall Street, triggering a near collapse of the economy, principal write-downs to bring the housing market back to stability and liquidity is squarely within DeMarco’s mandate. He’s wrong to use his fiduciary responsibilities to Fannie and Freddie to oppose a solution that will help homeowners and the broader economy.

In fact, Edward DeMarco paid a government employee millions per year to bet that American homeowners wouldn't get the help they need – while his agency was making it harder for them to get that help.

An academic has studied DeMarco's insistence on increasing the Fannie/Freddie financial portfolio - which he says has no bearing on his refusal to do more to help homeowners - and has concluded that "there is a very significant conflict of interest [9]" that DeMarco and others have understated.

DeMarco's team has invested roughly $5 billion of Freddie Mac's $650 billion in "reverse floaters" which are essentially bets that the homeowners who aren't being helped by DeMarco's team will never get helped [10]. That conflict of interest is actually understated, said Christopher Mayer of Columbia Business School, because these "floaters" are derivatives that link back to $26 billion to $30 billion in mortgages. That makes the amount of mortgage loans subject to this conflict five to six times what was originally believed.

DeMarco killed a pilot program that could've helped millions – and hid it from Congress.

As a letter from Reps. Elijah Cummings and John Tierney [11] reveals, a former FHFA employee testified that there was a pilot program in principal reduction but "was terminated by senior officials at Fannie Mae who were 'philosophically opposed' to the concept of reducing principal."

DeMarco didn't reveal the existence of this program or its termination in his Congressional testimony.

DeMarco also misled Congress about the cost of a principal reduction program. It actually saves taxpayers $28 billion.

DeMarco misled Congress and the public when he said that principal forgiveness for all underwater mortgages would cost "almost $100 billion," since $100 billion is the estimated total of all underwater principal, not just the amount that would be reduced for distressed homeowners.

Another FHFA study showed that not reducing principal on these mortgages would cost more than $100 billion, as Cummings and Tierney noted, while yet another showed that a well-designed principal reduction program would actually save taxpayers $28 billion. DeMarco didn't mention those studies. [12]

DeMarco's trying to appoint private-sector bankers whose institutions had some of the worst foreclosure problems.

Fannie Mae is currently hunting for a new CEO [13]. Which names are at the top of the list?

One of them is Fannie Mae's current Chief Counsel, Timothy Mayapoulo, who was chief counsel for Bank of America in 2008. On Mayapoulo's watch, Bank of America was neck-deep in a wave of foreclosure fraud and other criminal activity, and has had to sign a number of multimillion-dollar settlements related to its business practices, including a charge that it illegally processed debit-card transactions [14] out of order in order to maximize overdraft fees.

Another is David Stevens, CEO of the Mortgage Bankers Association. Among other things, it owns and operates MERS Inc., the shell company that is at the center of much of the foreclosure fraud and deception. It's also the organization whose previous CEOs lectured homeowners on the immorality of walking away from underwater properties—while walking away from its own [15].

These are the kinds of people that Edward DeMarco thinks should be handling the taxpayers' money and entrusted with Fannie Mae's mission [16] "to keep money flowing to mortgage lenders, to help strengthen the U.S. housing and mortgage markets, and to support affordable homeownership."

Thousands of citizens are joining members of Congress and other leaders to say to Edward DeMarco: Move on mortgage relief—or be moved.

The Campaign for America's Future has called on its members to send a message to DeMarco to either support mortgage write-downs or step down from the Federal Housing Finance Agency and make way for someone who will serve the interests of homeowners. Leading Members of Congress are also sending the same message. You can also let the White House and your member of Congress know that you want Fannie Mae and Freddie Mac to allow mortgage write-downs. Wall Street is being heard on this; it’s time for the voices of people speaking on behalf of homeowners to be heard.

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» Read more from our blog [17] on this topic.