Once again we are hearing the misguided calls for the ouster of Edward DeMarco as the acting director of the Federal Housing Finance Agency. In a letter from House Democrats, the attestants claims the need for a “strong leader.”
The wording here is unusual because, after all, DeMarco is known for doing what is best for the FHFA bottom line, and resisted calls to leave so far. In fact, erroneous reports of his departure popped up as far back as October of last year.
You may not agree with his policy, but his steadfastness and commitment to public service is a pretty strong leadership skill.
The following statement is even more pernicious: “DeMarco demonstrated that he is not interested in obtaining real-world evidence that might contradict his pre-established views.” The real-world evidence supplied in the letter is 10.9 million residential borrowers who are in negative equity by 25% or more. The authors’ tone implies this tragic statistic is compounded by the fact these homeowners won’t get any help at all. This is not the reality.
Therefore, the same charge the Democrats level at DeMarco, DeMarco could also level at the Democrats.
The truth is, mortgage modifications are expected to continue at top speeds into 2013, according to an outlook report from DBRS. And principal reductions are already an available option, albeit not as popular; one that does not need to go wider. [See breakdown in chart, note modifications may combine options.]
Replacing DeMarco will not help the homeowners in the way Democrats anticipate. First of all, subprime issues largely continue mitigation at this point.
“We are going to see the U.S. Government calling for further loan modifications in 2013,” the report states. “However, since most of the delinquent subprime product has already been modified, we expect to see the majority of modifications being done in other products, such as prime loans and option ARMs.”
And in an environment of house appreciation, and this is something thankfully DeMarco understands, there is a danger to cramdown principal in regards to homeownership. A reduction in principal makes a mortgaged property immediately available to sell. And if sold at profit, will the taxpayers be refunded the difference?
To be clear, principal reductions are a common modification technique. But on a loan-by-loan basis, servicers need options, not mandates. The above DBRS chart shows principal reductions occur, across the board, around 20% of the time.
Furthermore, the lack of inventory is what is driving the housing recovery, with some arguing this is an artificial economic improvement. Even further, with more than a million REOs expected to come to market in 2013, the housing recovery could be harmed by an influx of homeowners, suddenly in positive equity, potentially putting millions more homes on the market.
The housing recovery is an economic tailwind that is in a delicate balance, able to be tipped in either direction. DeMarco understands this act, even if the House Democrats do not.
