Here’s where Mark Zandi stands on principal reductions today

Mark Zandi, chief economist for Moody’s Analytics, is a rumored candidate to head the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac.

Sitting FHFA director Ed DeMarco has been at the center of housing debate for a few years now, with the Obama administration at one point pushing him to allow principal reductions on loans owned or guaranteed by the government-sponsored enterprise.

As it stands today, the choice of Zandi makes the most sense of any candidate so far. His history as economic advisor to Republican Senator John McCain’s presidential campaign makes him likely to coast through the confirmation process.

So where does he stand on that key issue of principal reduction? After all, that’s the sticky point that has DeMarco detractors calling for his head.

Here’s where Zandi stood on the matter in May 2012 before the Senate Banking Committee:

“Facilitating more loan modifications, including those involving principal reduction, would be a much larger and costlier step but would bring the housing downturn to a quicker and more definite end,” he said. “Principal write-downs have economic positives and negatives, but are a net positive if well designed.”

In order to offset moral hazard, Zandi said principal modifications would require distinct eligibility requirements. The design mechanism would also need to root out potential fraud as well, he added.

Zandi’s testimony is smart enough to not give away how exactly he could make this happen. And holding this card close to his chest is the most likely reason his nomination would garner serious support; he will bring solutions with him.

But it is hard to say Zandi would be a huge supporter of widespread principal reductions today, judging by these very same comments. Zandi, for example, offers his support to principal reductions as a tool that “would bring the housing downturn to a quicker and more definite end.”

Zandi is an economist, and he will not be able to ignore the possibility the housing downturn has already come to an end. Would he really want to offer principal reductions in an environment of housing appreciation? Surely Zandi understands principal reductions bring a property to market value, hugely increasing the incentive to sell for a disgruntled homeowner.

I for one, don’t buy this last arguement. I don’t see these newly valued homes flooding the market to such a degree that inventory will till from demand to supply.

Furthermore funding principal reductions, Zandi adds, is not an issue.

“The number of modifications and the amount of principal reduction necessary to stabilize house prices can be reasonably financed with funds from the recent mortgage settlement and the president’s proposals to expand Home Affordable Modification Program,” he said.

To be clear, of all non-GSE mortgages eligible for HAMP, 70% actually included a principal reduction component during the month of February, the Obama administration reported earlier this month.

Such selectively seems unfair to Fannie and Freddie borrowers. But again, Zandi would offer principal reductions in an effort to stabilize house prices.

Therefore, developing a principal reduction platform may become unneccesary to Zandi.

He concluded his thought on the matter in May 2012 with a simpler solution: “Arguably the most straightforward policy step would be to provide further support to mortgage refinancing.”

So there is a very real possibility that Zandi may greatly soften his principal reduction support if he should ever lead the FHFA.

Which is really interesting, considering that is the same position which may get DeMarco fired.

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