“To be, or not to be, that is the question:
Whether ’tis Nobler in the mind to suffer
The Slings and Arrows of outrageous Fortune,
Or to take Arms against a Sea of troubles,
And by opposing end them: to die, to sleep”
Where is Shakespeare and his logic when we need him?
Ed DeMarco, head of FHFA, in a speech today signaled his continued opposition to any program for principal write-downs by the GSEs. His objection, and ultimate disagreement with the Obama administration, can be summarized as a fundamental difference in philosophy on protecting the tax payer.
Also, which homeowners should receive priority? Should homeowners who have defaulted on their mortgage payments be given financial assistance through a principal write-down program, while those homeowners who have continued making payments regardless of being upside down on their home debt to equity get nothing?
Mr. DeMarco fears that if you help one borrower, others will default to get part of that deal. A good fear if you ask me, if your congressional mandate is to protect the taxpayer.
Yet, the Obama Administration and even Treasury Secretary Timothy Geithner continue to insist that a principal write-down program is an economically sound idea.
If the Federal government forgives principal mortgage debt for even one American, then in fairness we should see mortgage debt forgiven for all Americans. We know this can’t and won’t happen, if for no other reason than there isn’t enough money to go around.
Mr. DeMarco as head of the FHFA has a Congressional Mandate to fulfill a fiduciary duty to the taxpayers who ultimately, financially support the GSEs. President Obama and the Democrats won’t change the official mandate for the FHFA because they realize that won’t be a win win for them.
Here are the reasons this principal reduction is not to be:
1. There are 11 Million Underwater homeowners. How do we pick and choose?
2. There is 800 Billion Dollars worth of mortgages underwater. Where do we get the money?
3. Many underwater homeowners hold 2nd liens on their homes. Does this mean that Freddie and Fannie have to reduce the first lien low enough to make the 2nd mortgage 100% whole again?
Think of it this way: There are 10 homes in a block. All 10 are underwater. Nine make their payments, but one has defaulted. So, that one home will get a lower interest rate and their mortgage balance cut down to market value, while the other 9 who pay their taxes and bills on time get nothing.
Does that seem fair and reasonable to you? And how can we prevent the other nine homeowners from defaulting, in order to get a principal reduction for themselves? Mr. DeMarco’s point is that there is a high likelihood of even greater numbers of defaults than we currently have, if principal reduction were to implemented.
Many Americans have suffered the “slings and arrows of outrageous fortune.” If we mean to help one, we need to help them all. Any arms we take up “against their sea of troubles” are not likely to be approved by Congress. And even if approval came, who has the money to do such a thing?
This is why I have always believed that there will never be a major national principal reduction program; it would be too controversial and expensive.
Logan Mohtashami is a senior loan officer at his family owned mortgage company AMC Lending Group, which has been providing mortgage services for California since 1988. Logan is also a financial columnist for Benzinga.com and contributor for BusinessInsider.com