By Robert Romano — Responding to criticism that the Federal Housing Finance Administration (FHFA) is not doing enough to deal with the ongoing economic downturn in housing, the Obama Administration is firing back that it is working within the limits set forward by Congress.
Democrat members of Congress want the FHFA to write down loan balances for borrowers that are hopelessly underwater on their mortgages. There is over $700 billion of negative equity in the U.S. housing market — more money owed than homes are actually worth.
“Some of those things that are being advocated for us to do really go beyond what Congress has given us the authority to do,” said FHFA director Edward DeMarco.
Which is rather ironic coming from the FHFA, because going beyond congressional authority has been standard operating procedure for the agency since Fannie Mae and Freddie Mac were placed under conservatorship in 2008.
Take Barack Obama’s latest plan to allow underwater borrowers to refinance mortgages that are over 25 percent higher than the market value of the homes.
“[W]e’re not going to wait for Congress,” he boldly declared in a recent speech in Nevada, particularly hard-hit by the recession, even 4 years after the housing bubble began to pop in 2007.
Although the authorizing legislation provided for refinancing federally insured mortgages, it explicitly stated that those shall “not exceed 90 percent of the appraised value of the property to which such mortgage relates.”
Of course, that didn’t stop the FHFA on July 1, 2009 from blowing way past that limit, allowing refi’s up to 125 percent loan-to-value. It is said the argument then was that the risk of the refinanced loans was already assumed by the GSEs, and that the statute mandated the agency “ensure that… each regulated entity operates in a safe and sound manner”.
Following the logic, if mortgages with slightly lower interest rates have a slightly lower rate of default, the cost of the lower interest payments would be offset by fewer defaults. Thus the agency claims that the refi’s are consistent with the mandate to operate “in a safe and sound manner”.
Which, would be a rather generous reading of the statute. If Congress had intended to allow refi’s above 90 percent loan-to-value and beyond the scope of federally insured mortgages under the conservatorship, it would have said so. What the FHFA did in 2009, and again on Oct. 24 allow refi’s above 125 percent loan-to-value, was a step far beyond that congressional intent.
All of which makes DeMarco’s claims to fidelity with the law all the more important, saying he was acting within his “statutory authority.” He thinks that if there is at least an argument to be made that the policy change is consistent with the “safety and soundness” of the GSEs, then he is authorized to do it.
Meanwhile, those who are advocating an outright write-down of underwater Fannie and Freddie mortgages would therefore, by the overseeing agency’s own admission, be endangering the “safety and soundness” of the GSEs, costing billions more of taxpayers. To date, the Government Sponsored Enterprises (GSEs) have collected more than $170 billion from taxpayers to keep the firms solvent.
Congress gave the GSEs an unlimited credit line with the U.S. Treasury as losses are realized that expires at the end of 2012. After that, it can only draw another $275 billion, according to former chief credit officer of Fannie Mae and American Enterprise Institute fellow Edward Pinto, who recently analyzed the statute that brought the GSEs into conservatorship.
The price tag of the write-downs might explain why Democrat lawmakers are eager to have the FHFA implement their plans now — while the GSEs have an unlimited credit line.
And it may also explain why the Obama Administration is not so eager. Not because it necessarily cares a whit about following the law, as outlined above, but because it has a larger priority — getting reelected.
Robert Romano is the Senior Editor of Americans for Limited Government.