The political masses gathered their torches and pitchforks and spent the last few months calling for Edward DeMarco to cave or quit over principal reductions at the government-sponsored enterprises. And it looks like DeMarco won't be doing either any time soon. What he will do, criticism notwithstanding, is wrap up the Federal Housing Finance Agency policy toward principal reductions.
Furthermore, at the Brookings Institute Tuesday, DeMarco did what he always does. He apolitically laid out the preliminary and still-ongoing analysis. What the numbers showed, relative to the roughly $700 billion negative equity problem in the U.S., is that numbers don't show very much.
To sum up:
- There are roughly 11 million borrowers underwater
- 2.5 million to 2.6 million hold GSE loans at 115% LTV or higher
- Of those, roughly 2 million are current
- DeMarco said at most the principal reduction program could be used for up to nearly 700,000 borrowers (accounting for some borrowers who fall behind on their payments)
He did say such a program could save the GSEs $1.7 billion in losses but at a net cost of $2.1 billion in taxpayers, most of whom are current.
And this was his point.
"This creates a sense across the country for all borrowers paying their mortgage at 140% LTV to ask, 'What am I doing this for? I'm doing this because I feel obligated to. But the government is providing the opportunity...'" he said. In fact, if just between 11% and 13% of the ultimate amount of borrowers who receive principal reduction do so by strategically defaulting, it could wipe out the sliver of savings Fannie Mae and Freddie Mac could get (Click to expand).
Anthony Sanders, finance professor at George Mason University, stressed the need for more data. Such a step would be an unprecedented gamble with only anecdotal evidence of it working.
"It sets a dangerous precedent. Imagine a stock market HAMP, where pension funds and equity investors could be bailed out," he said on a follow-up panel to DeMarco. "What kind of behavior do you think that would breed?"
Andrew Jakabovics, senior director at Enterprise Community Partners, Inc., sat next to Sanders on the panel and pointed out that at least now with the analysis showing principal reductions can save the GSEs some losses, at least it can be part of the tool kit for those who could benefit.
"Simply saying principal reduction won't work under any circumstances doesn't make sense. It may only be half a million GSE borrowers that may be helped, and then maybe only 50,000 qualify but then that's still 50,000 people better off because principal reduction is at least offered," Jakabovics said.
Shared appreciation was brought up to DeMarco. Some servicers are doing it, most notably Ocwen Financial Corp. [stock OCN][/stock]. The idea is to write down the principal, and the bank can then share the appreciation of the property as the market recovers.
DeMarco did everything but completely shoot the idea down. He pointed out a shared appreciation plan would force Fannie and Freddie to take the loan onto their balance sheet (the opposite of what they're trying to do) and would require tech upgrades and new tools for the thousands of servicers, the same as a principal reduction plan.
"Principal forbearance is a form of shared appreciation," DeMarco said. "It's a less complicated form of it because we don't have to track it. We're setting aside this forborn amount."
Mark Fleming, chief economist at CoreLogic [stock CLGX][/stock], said on the follow-up panel that if nothing is done and the market is simply given time to bring these underwater borrowers back to the surface, the wait may be awhile for some.
"Negative equity is not a problem that is going away any time soon," he said, "Not in Las Vegas, anyway. It could last five years or even 10 years."
And DeMarco finished the Q&A session following his speech often as he concludes Q&A sessions before Congress. Time, he said, for this issue and conservatorship in general, is not a luxury.
"This issue needs to be brought to a conclusion," DeMarco said. "We're looking to wrap this up in the next few weeks."
So, have the torches gone out for good? Maybe they're dimmed, but the masses are still waiting.
Rep. Elijah Cummings, D-Md., who led the effort to persuade the FHFA to disclose its earlier analysis, sent out a statement following the DeMarco speech:
"Although I am encouraged that Mr. DeMarco has now begun to move in this direction, we continue to await the documents and analyses we requested months ago, and the jury is still out on whether he will act to serve both homeowner and taxpayer best interests.”