A Matter of Principal. . .Reduction?
I’m back blogging this morning after attending the State Governmental Affairs Conference all week. Kudos to those of you who attended. I understand why most of you are too sane to want to do this type of thing for a living, but a few of your stories to well-place legislators and staff go a long way toward getting things done. Ok, no more Mr. Nice Guy.
One of the areas of unfinished business is housing policy reform. An article that came out earlier this week in the Housing Wire reports that New York Attorney General Eric Schneiderman wrote a letter to the Federal Housing Finance Administration urging it to adopt mortgage principal reduction as a policy. According to Schneiderman, in 2013 alone there were 60,000 homeowners in New York who were delinquent in mortgages controlled by Fannie Mae and Freddie Mac. He goes on to argue that “there is significant evidence that homeowners who are seriously delinquent on their mortgages are most likely to avoid foreclosure and remain in their homes when reduction of principal balance is part of the loan modification offer. . .while virtually all of the large, commercial single family lenders now include principal reduction in their foreclosure mitigation options,” Fannie and Freddie do not.
First, I would love to know how much an academic researcher got paid for figuring out that people who get a reduction in their mortgage principal are more likely to be able to afford their house. Next thing you know, we will have conclusive proof that the sun rises in the East and sets in the West. Secondly, having just watched The Big Short, calls for principal reduction have a certain facial appeal. You wouldn’t know it from watching the movie, but Fannie and Freddie were willing participants and contributors to the securitization frenzy that indirectly led to the Great Recession. Surely, giving a little back is the “right thing to do.”
But then, let’s get back to reality. First, Fannie and Freddie are bankrupt entities and like any trustee administering a bankrupt estate, the FHFA has a fiduciary obligation to maximize its value. Furthermore, as my Mother taught me growing up, two wrongs don’t make a right. Should policy makers do more to reign in the big banks? Absolutely. But, for the life of me I don’t understand why taxpayer supported entities should be on the hook for bailing out the bad financial decisions of other taxpayers.
I believe that if we don’t learn from our mistakes, we are bound to repeat them. The American public wasn’t a victim of excessive real estate zeal so much as a willing accomplice. I, for one, don’t want to see taxpayer supported institutions, which shouldn’t even exist at this point, bail out one set of taxpayers at the expense of others who were able to pay their bills. Foreclosures are a tragedy, but they shouldn’t be avoided at all costs.