FHFA’s DeMarco: Several Weeks Before a Decision on Principal Reductions (Jurassic Park Alert!)

Confounded Interest ^ | 04/11/2012 | Anthony B. Sanders

[whitedog57]

Today, FHFA updated their study of principal reductions and Director Ed DeMarco presented the new results. He did NOT announce any trial program or agreement with the Obama Administration about using Fannie Mae and Freddie Mac to salvage the housing market. But he did say that an announcement will be out in a few weeks.

As I said at Brookings, we have very little empirical evidence (other than anecdotal stories) that principal reductions work. We have not been through 3-4 years of mortgage modifications with principal reductions to see if they are as effective as forbearance in preventing defaults. FHFA (like principal reduction advocates) are reliant on NPV calculations that are very subjective.

Here is the Brookings Institute meeting with DeMarco as keynote and me as a panelist (on the far left). And here is my interview with Fox’s Peter Barnes on the Brookings conference (my comments of Treasury's shell game).

Frankly, I think DeMarco should receive the President’s Medal of Freedom (but somehow I don’t think that will happen). Rather, I think of the film “Barbarians at the Gate” with DeMarco guarding the gate with a single sword.

Remember Jurassic Park. We got into this mess by well-intended housing policies (e.g., National Homeownership Strategy until Clinton) that took on a life of their own. But this time, the T-Rex killed homeowners financially (loss of $7.4 trillion of borrower equity).

So, be careful about massive policy decisions concerning housing and the mortgage market without ample empirical support about the costs and impacts. There are still T-Rexs and raptors lurking in the background.

Taxpayer running from Principal Reduction Advocate

[whitedog57]

I didn't find this until today (posted on Zero Hedge yesterday). The debate between this guy and the former HUD Housing policy person is classic (at end of the Brookings speeck and debate). The ex-Obama guy is the short one and Sanders is the big guy at the end.

Pretty funny except that principal reductions are a sad political solution.