A bit of buzz in Washington that not only will President Obama replace Ed DeMarco — perhaps with a stick-it-in-your-eye recess appointment — as the regulator of Fannie and Freddie — but also that DeMarco’s departure from the Federal Housing Finance Agency would lead to some sort of broad principal forgiveness program As the FT reports:
Investors in the US are marking down the prices of securities backed by mortgages written before the financial crisis, anticipating that the re-election of President Barack Obama presages a new effort to help distressed borrowers refinance their loans.
The sell-off is being dubbed “the DeMarco trade” after Edward DeMarco, acting director of the Federal Housing Finance Agency. The Obama administration has quietly told housing industry activists in recent weeks that he will be replaced as head of the agency that supervises government-run mortgage finance agencies Fannie Mae and Freddie Mac.
Mr DeMarco has repeatedly clashed with the administration over its hopes of using Fannie and Freddie to enable more borrowers to write off part of their mortgage debt, a move called “principal forgiveness” that officials believe could stimulate the housing market and the broader US economy.
But Jaret Seiberg, analyst at Guggenheim Securities’ Washington Research Group, is dubious. In a new research note, he argues that just broadly forgiving mortgage principal for underwater borrowers is too expensive since, by law, the FHFA is suppose to limit taxpayer losses. More likely any forgiveness would be limited to “borrowers who are seriously underwater and who have not made payments for two years or longer. We do not see this as a large universe of borrowers.”
You might also recall that the back in Obama’s 2012 State of the Union speech, there was this stab at new housing policy:
And that’s why I’m sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low rates. No more red tape. No more runaround from the banks. A small fee on the largest financial institutions will ensure that it won’t add to the deficit and will give those banks that were rescued by taxpayers a chance to repay a deficit of trust.
Basically, Obama was calling for a way to allow homeowners with non-government backed loans to refinance into FHA loans. It didn’t seem likely then and it seems even less likely now given that the FHA may need a taxpayer bailout. Seiberg: “In short, there is no real path forward to refinance non-agency mortgages into FHA loans. So we see little government help on the horizon for these borrowers.”
Now the president might have somewhat better luck with Congress by just focusing on Fannie and Freddie mortgages. Economists Glenn Hubbard and Chris Mayer have devised a center-right mass refi plan. As Mayer described it in congressional testimony $242 billion split equally between the government and lenders. Hubbard and Mayer calculate the economic impact this way:
The typical borrower would reduce his or her principal and interest payments by about $350 dollars, a total reduction in mortgage payments of nearly $100 billion per year. …
The macroeconomic stimulus effect should also include an additional housing wealth effect. At the low end of our estimates, improved mortgage market operations would reduce house price declines by 10 percent. With an estimated aggregate housing valuation of about $18 trillion, housing wealth would increase about $1.8 trillion relative to what it might fall to without this program.
If we assume a relatively low marginal propensity to consume out of housing wealth of 3.5 percent, U.S. consumption would rise by $63 billion relative to what would otherwise have occurred. … Combining these estimates gives a total macroeconomic stimulus of as $118 billion per year in lower mortgage payments and any new consumer spending due to a housing wealth effect. In addition to the direct macroeconomic stimulus, jump-starting the stalled housing market will increase employment in a variety of industries that depend on housing transactions (mortgage and real estate brokers, home supply companies, moving companies, etc.) as well as increase the efficiency of the labor market by reducing impediments to households moving to take another job.