A recent study showed that more homes are underwater than originally believed. Roughly 16 million borrowers owe the banks $1.2 trillion (with a "t") for real estate value value that no longer exists. We did some projections from that date to come up with the full scope of the problem and found that more than 40 million people live in those homes, with total mortgages outstanding of roughly $4.8 trillion.
Major principal reduction would reduce the monthly burden for millions of families. It would free up tens of billions of dollars -- or hundreds of billions -- reducing monthly payments substantially. Struggling households would then spend most of that money for things other than the unjust enrichment of wealthy bankers -- consumer goods and services, mostly.
A broad principal relief plan would be the equivalent of a massive stimulus program, one that could create millions of jobs and help jump-start economic growth. And it would do it without costing the Federal government a cent.
Stop That Bureaucrat!
The Administration's actions for struggling homeowners have generally run the gamut from ineffectual or inept to downright cynical. Now the White House says it wants to do more, but there's a problem: Edward DeMarco. DeMarco's the Acting Director of the FHFA, the agency which took control of government-backed lenders Fannie Mae and Freddie Mac after their bipartisan-backed "privatization" led to an orgy of executive greed and incompetence.
Whether out of ideology or bank coziness, DeMarco has refused every entreaty for principal from detailed economic analyses to heartfelt moral appeals. As Paul Krugman notes today in a post called "Fire Ed DeMarco," DeMarco's latest move is outrageous. He's gone well beyond his agency's mandate to justify his inaction. As Krugman says, "deciding whether debt relief is a good policy for the nation as a whole is not DeMarco's job."
DeMarco's now the Administration's target of choice, with Tim Geithner playing the "good cop" role. "I urge you to reconsider this decision," Geithner wrote to DeMarco in genteel public memo whose mildness brought to mind Groucho Marx's remark to a gangster who was about to kill him:
"I'm not in the habit of making threats, Sir, but there'll be a letter about this in the Times tomorrow morning!"
Bizarro Jimmy Stewart?
Can one bureaucrat's intransigence stymy an entire Administration? If so then DeMarco's the Bizarro World version of Jimmy Stewart in Mr. Smith Goes to Washington, tie askew and sweat pouring down his brow, staging a one-man holding action against decent government.
The so-called "independence" of regulators is a complex topic for another day. What that usually means is that agencies become captive to the industries they regulate, leaving them "independent" only from the public that created them. But some doubt the whole story and say DeMarco's merely a foil.
Yves Smith says "Obama has never been serious about helping homeowners," and nothing in his Administration's performance refutes that. "DeMarco knows he won't be fired," writes David Dayen. "He's become the symbol in the story, and the Administration is much more interested in symbolism when it comes to housing."
Paul Krugman, on the other hand, argues that while "the uncomfortable truth... is that the administration -- and Tim Geithner in particular -- seemed indifferent or even hostile to debt relief for a long time."
"That was a big mistake," adds Krugman. "But it's also in the past, and the administration has now seen the light."
So who's right ? The only one way we'll ever know one way or the other is if the Administration does something meaningful about principal reduction.