The debate over whether the FHFA should allow Fannie and Freddie to do broad-based principal write-downs is interesting, but can they legally order them? Well, it depends on who you ask.

Mark Calabria, director of financial regulation studies at Cato, published a rather scathing blog essentially making fun of those say the FHFA has the legal authority to enable broad based principal write-downs. He said the notion that such a move would save the economy “shows a stunning lack of understanding of both the mortgage market and the economy in general.”

As Calabria explained in a blog in August, the mortgage giants are under conservatorship and are thus prevented from bailing out underwater homeowners. Thus, Calabria said, there is no legal justification for “sticking it to taxpayers for another $100 billion.”

Rep. Barney Frank, D-Mass., disagrees.

"There's nothing in the mission of the FHFA that keeps him from doing this," Frank said last month to HousingWire. "That's his choice." 

DeMarco has himself has alluded to the legal ability to do principal write downs in his testimony before the Senate Banking Committee on Feb. 28 in which he said, “I’ve not said that we do not have the legal authority to reduce principal.”

But that quote is pretty vague. DeMarco seems to have gone back and forth on the issue, previously suggesting that congress may have to author legislation in order for it to be a possibility.

So I contacted Stefanie Johnson, public affairs officer at the FHFA, who clarified that the quote “says we do have the authority.”

So there you have it. Straight from the horse's mouth.

Or is it that simple? Calabria said no.

In an email exchange, Calabria explained it is “a case of whether we are talking about legal authority to allow principal write-downs or legal authority to impose losses on the GSEs for ‘public purpose’ rather than conserve their assets.”

While Calabria said they do, in fact, have the legal authority to allow principal write-downs, they don’t have the authority to impose losses on the GSEs.

“So to some extent this is a case of being imprecise.  If you look at what Barney Frank has been saying, he's argued that FHFA has a mission to help the housing market, even if that means GSEs take a loss.  That's not true is my point.  The duties and goals of conservatorship are quite narrow,” he said.

Aren’t laws supposed to be straightforward? So we can, you know, follow them?

Confusing legal arguments aside, should the FHFA even be dealing with this? Or is there a better way to offer these broad-based principal write-downs?

Says Calabria:

“…if some members of Congress believe we should spend $100 billion bailing out deadbeats, then why don’t they simply offer a bill on the floors of the House and Senate doing so? …The notion, instead, that an unelected, un-appointed, acting agency head should, in the absence of clear authority to do so, spend $100 billion is simply offensive to our system of government.”

Food for thought.