DeMarco’s One Correct Point

Liberals have been jumping on Federal Housing Finance Agency (FHFA) leader Ed DeMarco for not allowing principal reduction for mortgages held by Fannie Mae and Freddie Mac. Such a policy would bring many homeowners above water and allow them to refinance at lower interest rates and afford their mortgages. Here’s Krugman:

In any case, however, deciding whether debt relief is a good policy for the nation as a whole is not DeMarco’s job. His job — as long as he keeps it, which I hope is a very short period of time — is to run his agency. If the Secretary of the Treasury, acting on behalf of the president, believes that it is in the national interest to spend some taxpayer funds on debt relief, in a way that actually improves the FHFA’s budget position, the agency’s director has no business deciding on his own that he prefers not to act.

I don’t know what DeMarco’s specific legal mandate is. But there is simply no way that it makes sense for an agency director to use his position to block implementation of the president’s economic policy, not because it would hurt his agency’s operations, but simply because he disagrees with that policy.

That’s 100% correct and it’s terrible that DeMarco is overstepping his bounds. However, DeMarco also made one good point:

Perhaps the greatest risk of the Enterprises’ allowing principal forgiveness is one with far more significant long-term consequences for mortgage credit availability. Fundamentally, principal forgiveness rewrites a contract in a way that other loan modification programs do not. Forgiving debt owed pursuant to a lawful, valid contract risks creating a longer-term view by investors that the mortgage contract is less secure than ever before. Longer-term, this view could lead to higher mortgage rates, a constriction in mortgage credit lending or both, outcomes that would be inconsistent with FHFA’s mandate to promote stability and liquidity in mortgage markets and access to mortgage credit.

I’ve talked about this before in using eminent domain for principal reduction. It’s a real issue that many economic bloggers are overlooking. Here’s Felix Salmon’s response: Continue reading “DeMarco’s One Correct Point”