Rep. Mel Watt (D-NC), Barack Obama’s pick to head up the Federal Housing Finance Agency (FHFA) is a major supporter of mortgage principal reductions.
In a Dec. 2012 letter he co-signed 18 other House Democrats, Watt urged congressional leaders and the White House to “provide assistance to homeowners who are currently underwater on their mortgages, including provisions that will provide principal reduction modifications to borrowers with loans guaranteed by Fannie Mae and Freddie Mac.”
The FHFA is the agency that administers mortgage giants Fannie Mae and Freddie Mac, representing about half the U.S. mortgage market at $5 trillion.
A bailout could apply to as many as 10.4 million borrowers who are $628 billion underwater on their mortgages according to data compiled by CoreLogic. These are borrowers who owe more on their homes than they are worth.
Yet, the program advocated by the House Democrats to do this, the Making Home Affordable-Principal Reduction Alternative, would only “help as many as half a million homeowners,” according to the letter. That is just 4.8 percent of the 10.4 million borrowers who are currently underwater on their mortgages.
So, this would just be a bailout to a specialized, favored constituency — on its face, the bailout would leave more than 95 percent of the negative equity out there — and Watt and the FHFA would get to choose who gets the bailout.
Why even bother?
The Watt selection comes on the heels of current agency acting director Edward DeMarco on July 31 rejecting the same exact Obama plan to bail out a select few underwater borrowers, citing cost concerns.
The agency undertook a thorough analysis of the program, showing reductions of mortgage principal owed for certain borrowers would cost taxpayers more and even potentially result in more defaults.
Even under the program’s best case scenario, the agency estimated just 248,000 borrowers would be eligible for principal reductions under the Home Affordable Modification Program Principal Reduction Alternative — even fewer than the House Democrat estimate.
This bailout would do almost nothing to solve the problem of underwater borrowers. Yet, Obama, through his selection of Watt, remains committed to implementing a policy based on pure fiction.
Former Treasury Secretary Timothy Geithner, in a letter to DeMarco responding to his decision not to implement the bailout, maintained the façade that the program would somehow “help repair the nation’s housing market”.
In fact, according to the FHFA, some 80 percent of underwater borrowers who have GSE mortgages are current on their payments. But that could change if a bailout is implemented.
As DeMarco noted in his letter to Congress, selective application of the program could create a perverse incentive for borrowers to miss payments and potentially default in a misguided attempt to qualify for the bailout.
Under the program’s best case scenario — where all 248,000 underwater borrowers qualify — if just 19,000 of the more than 10 million remaining borrowers who did not were to strategically default, it would more than offset any potential benefit derived.
As a result, “HAMP PRA would result in a net loss to taxpayers, even using the model-based assumptions most favorable to the program,” wrote DeMarco.
But then again, the Obama Administration does not care about all that, do they? The goal is not to “help repair the nation’s housing market,” really, it’s to build a constituency of borrowers underwater on their mortgages with the hope that they might — emphasis on might — be able to get some relief.
To call that cynical would be an understatement. This is Tammany Hall brought to Washington, D.C., political graft at its worst for the select few who had the inside track.
It is time for the Senate to just say no — and keep Congress in session while they’re at it. No more bailouts.
It’s bad enough Mel Watt has a seat on the House Financial Services Committee, the last thing taxpayers need is him in charge of an already insolvent $5 trillion agency that nearly destroyed the economy so he can hand out favors to a few favored constituencies.
Robert Romano is the Senior Editor of Americans for Limited Government.