Tick-Tock, Ed

March 23rd, 2012 at 4:34 am

A few weeks ago I wrote a post arguing that principal reduction is one of the most promising items on the policy menu for helping homeowners facing default on their mortgage and foreclosure.  That post also notes that Fannie and Freddie have an integral role to play here, but have resisted doing so for reasons I understand but disagree with.

Anyway, in the interest of incentivizing Fan and Fred’s regulator, the FHFA led by director Ed DeMarco, to get into the writedown biz, the White House significantly kicked up the incentives under their HAMP program, and while DeMarco is on record against the idea, according to an NPR story this AM:

…now Fannie and Freddie appear to be saying the opposite. In part that’s because the Obama administration has recently tripled the incentives it offers to lenders who do these principal write-downs. So now, in many cases, if a lender writes off, say, $50,000 of principal, the government will reimburse half that — $25,000.

The FHFA claims to still be crunching the numbers to decide if principal reduction is consistent with their responsibilities as conservators of the agencies, but that shouldn’t take as long as it’s taking.  The figures below show a) existing home sales have stopped cratering, but their bumping along the bottom, b) GDP is still being whacked by low residential investment, and c) an awfully tight fit between state-level changes in unemployment and the share of underwater mortgages in that state, something principal reduction directly targets.

The FHFA needs to make the call.  Are they in or out, re principal writedowns?  I’ve publically advocated that they should be given a chance to run the analysis based on the new incentives, but they should be done by now.  America’s homeowners, not to mention its macroeconomy, deserve an answer–now.

Source: Census Bureau

Source: BEA NIPA

Source: BLS, CoreLogic (y-axis is ppt change in the state unemployment rate; x-axis is share of underwater mortgages in the state).

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