In what can only be described as the best decision of the housing bust a from regulator, Federal Housing Finance Agency’s head Edward DeMarco said there will be no principal reduction on Fannie and Freddie loans. He will be loudly criticized, particularly from left-wing panderers, but Mr. DeMarco understands that Moral hazard is the central issue in housing bust, and giving away free money to loan owners is never a good idea. Millions of loanowners will be crushed by this news. Everyone who doesn’t want to see their tax dollars squandered to bail them out will rejoice.
By Rachelle Younglai — WASHINGTON | Tue Jul 31, 2012 5:41pm EDT
(Reuters) – The top housing regulator rebuffed a plan by the Obama administration to cut mortgages held by struggling homeowners, a blow to the White House which is keen to show voters it can help fix the housing market.
I don’t see how this is a big blow to the Obama Administration. It isn’t like Romney was out saying principal reduction is a good idea. This may anger some on the extreme left, but those people were going to vote for Obama anyway. I rather doubt swing voters in the middle are going to vote for Romney because they believe he will endorse forgiving the principal balance on their mortgages.
The regulator for government-run housing finance giants Fannie Mae and Freddie Mac said on Tuesday that using taxpayer-funded bank bailout money could encourage defaults and not make a big improvement in reducing foreclosures in a cost-effective way for taxpayers.
“The anticipated benefits do not outweigh the costs and risks,” said the Federal Housing Finance Agency’s head Edward DeMarco, who has come under intense pressure from the government to agree to the plan.
He is absolutely correct. It’s more cost effective to take a big loss on 10% of the portfolio rather than a somewhat smaller loss on 100% of it.
The regulator’s decision drew an immediate rebuke from the Obama administration and Democratic lawmakers. Treasury Secretary Timothy Geithner disputed the agency’s conclusions and urged DeMarco to reconsider his decision.
Although the housing market has shown signs of recovery, about 11 million homeowners owe more than their properties are worth and the Obama administration has struggled with various taxpayer-funded programs to keep people in their homes.
“I do not believe it is the best decision for the country,” Geithner told DeMarco in a letter released to the media.
The use of targeted principal reduction would “provide much needed help to a significant number of troubled homeowners, help repair the nation’s housing market and result in a net benefit to taxpayers,” he said.
Geithner pointed out that DeMarco’s own data showed that the program would help nearly half a million homeowners and save taxpayers as much as $1 billion.
The housing regulator responded saying that figure only applied to a group of homeowners that had not made a mortgage payment in a year and would assume all those borrowers would win a mortgage writedown — a scenario deemed unlikely.
Rather, DeMarco’s analysis showed that the projected net benefit to taxpayers would be $500 million in the best case scenario and its experience has shown that the likelihood of successfully modifying mortgages was small.
The scholarly paper at the center of this controversy was put out by people with an agenda. DeMarco’s analysis is much closer to reality. The squatters who are deeply underwater are committed to squatting until foreclosure pushes them out. If you reduced their principal a little, it’s not likely they would suddenly start dutifully making their payments.
The administration has pressed DeMarco to allow Fannie and Freddie to do more principal writedowns. But DeMarco has maintained that this would needlessly drive up the costs of their taxpayer bailout.
He is right. It would.
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Proprietary Irvine Housing News home purchase analysis
$649,000 …….. Asking Price
$305,000 ………. Purchase Price
2/6/1998 ………. Purchase Date
$344,000 ………. Gross Gain (Loss)
($24,400) ………… Commissions and Costs at 8%
$319,600 ………. Net Gain (Loss)
112.8% ………. Gross Percent Change
104.8% ………. Net Percent Change
5.2% ………… Annual Appreciation
Cost of Home Ownership
$649,000 …….. Asking Price
$129,800 ………… 20% Down Conventional
3.56% …………. Mortgage Interest Rate
30 ……………… Number of Years
$519,200 …….. Mortgage
$120,758 ………. Income Requirement
$2,349 ………… Monthly Mortgage Payment
$562 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$162 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$46 ………… Homeowners Association Fees
$3,120 ………. Monthly Cash Outlays
($368) ………. Tax Savings
($809) ………. Equity Hidden in Payment
$149 ………….. Lost Income to Down Payment
$101 ………….. Maintenance and Replacement Reserves
$2,193 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$7,990 ………… Furnishing and Move In at 1% + $1,500
$7,990 ………… Closing Costs at 1% + $1,500
$5,192 ………… Interest Points
$129,800 ………… Down Payment
$150,972 ………. Total Cash Costs
$33,600 ………. Emergency Cash Reserves
$184,572 ………. Total Savings Needed
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