One by one, the excuses have fallen. Yet Edward DeMarco, acting head of FHFA, the agency that runs Fannie Mae and Freddie Mac, still fails to offer the most effective relief available to American homeowners struggling with mortgages held by those entities. Economists, housing experts, and members of DeMarco’s own staff have concluded that reducing to affordable levels the principal owed on at-risk mortgages is effective in reducing foreclosures and their destructive fallout. But, inexplicably, he’s been unmoved by the mounting evidence.
Last month, after hinting at a possible change of heart, DeMarco punted on the question, saying it needed more study and stating that such a policy question “should be determined by Congress.” But the evidence is too clear, and the stakes are too high, for further delay. It’s time for DeMarco to either act in the nation’s interest or get out of the way.
While many parts of our economy have gradually improved over the last several years, foreclosures are on the rise in regions around the country. The foreclosure data company RealtyTrac has predicted that one million American homes may enter foreclosure in 2012. An estimated 12 million Americans currently owe more on their mortgages than their homes are worth, meaning that millions more are at risk.
Fannie, Freddie, and FHFA have an oversized role to play in addressing the crisis, since the entities are assumed to own or back roughly 3.3 million underwater mortgages and help set trends in the larger market. By including principal reduction among the tools they use, they could help millions of Americans save their homes while making sustainable payments toward the actual value of their property.
The American people essentially own Fannie and Freddie after a $150 billion bailout. Even before that, the entities were tasked with providing stability and affordability to the nation's mortgage finance market. FHFA’s mission similarly includes supporting housing finance, affordable housing, and a stable and liquid mortgage market, as well as promoting Fannie and Freddie’s safety and soundness.
The calls for principal reduction are growing louder, with evidence increasingly demonstrating that those interests all point toward principal reduction. It results in fewer foreclosures, as compared with alternatives like loan forbearance (delaying loan obligations) that FHFA has authorized. In addition to the obvious benefits to struggling homeowners, reducing foreclosures improves neighborhood home values, prevents abandoned and blighted properties, and saves cash-strapped municipalities the costs of upkeep and enforcement.
Many private lenders have been reducing principal obligations on their own, recognizing it’s often the best way for them to recoup their investment. Moreover, the strategy was a significant part of the Attorneys General settlement over “robo-signing” and related bank misconduct.
Reports have emerged that even FHFA’s own internal analyses show principal reduction is in the interest of both underwater homeowners and Fannie and Freddie. Documents recently obtained by the Congressional Progressive Caucus reportedly show that DeMarco’s agency studied the question in 2009, decided it was worth trying, worked with a major lender to develop a detailed pilot, and then abruptly canceled it in July of 2010 for what the Caucus says were ideological reasons.
To be sure, principal reduction is not a silver bullet. A range of aggressive solutions are necessary to address America’s foreclosure crisis, restore ravaged neighborhoods, and put our national economy back on track. Indeed, a coalition of housing and public interest groups that includes The Opportunity Agenda, National Council of La Raza, and the National Fair Housing Alliance has released a Compact for Home Opportunity highlighting over a dozen actions that government, private industry, and individuals can take to turn things around.
Principal reduction may be only one of those actions. But it’s an important one. With a million American homes at risk of foreclosure, the time for action is now.