DS News - Digital Archives

» way. There are big challenges facing the country's housing system. There are a lot of borrowers in distress, and there are a lot of taxpayer dollars that have already been spent through this housing and financial crisis. And we are working diligently to simultaneously provide relief to troubled homeowners, stability to the housing market, and protection to taxpayers. In that mix, trying to satisfy those three objectives, you're never going to make everyone happy. But we're trying to be consistent and we're trying to be transparent in how we're going about carrying out those responsibilities." That attention to the public trust— regardless of politics—resonates throughout DeMarco's public and private declarations. It's no surprise to Michael Orton, who met DeMarco when they were both students at the University of Notre Dame 30 years ago. "He just wants to serve the public," Orton said in an interview. "He didn't ask for the role he's in; he does it sincerely and honestly and honorably." The Numbers DeMarco revisited the principal forgiveness issue in an April 4 speech at the Brookings Institution, showing with graphs and statistics the outcomes from various loss mitigation approaches. The figures showed that borrower performance among those participating in the Home Affordable Modification Program (HAMP) was only loosely related to variations in loan-to-value, hovering between 72 and 76 percent regardless of how underwater the borrowers were. For non-HAMP proprietary modifications, the range was 70 to 74 percent. This undercuts a primary argument for principal write-downs; if borrowers remain severely underwater after a modification, they'll be more likely to re-default. But these borrowers already demonstrated a willingness to accept modifications with no reduction in principal, so any re-defaults would likely reflect inability to pay, not unwillingness. Negative equity does increase the likelihood that homeowners will default in the first place, DeMarco acknowledged. On the other hand, statistics showed that borrower performance on modified loans was closely tied to reductions in monthly payment amounts. The message: Borrowers who agree to modifications will generally keep paying if they can, so the key to success is to find ways to cut the payments to affordable levels. DeMarco argued that the tools already in place are sufficient to accomplish that—interest rate reductions, loan term extensions, and principal forbearance. These methods could achieve the goal without the irreversible investor losses principal write-downs incur. DeMarco also touched on a point that is commonly misunderstood: Any principal reduction would only be applied as one of several loss mitigation tools and only on a portion of that minority of delinquent loans. "This is not about some huge difference-making program that will rescue the housing market," he said. "It is a debate about which tools, at the margin, better balance two goals: maximizing assistance to several hundred thousand homeowners while minimizing further cost to all other homeowners and taxpayers." The larger worry in implementing a principal forgiveness program is how it would impact the majority of borrowers who remain current even though they may be underwater. How many of them would intentionally default to gain the same benefits as their delinquent neighbors? A stampede of "strategic modifiers" could inflict unacceptable losses. On the other side of the ledger, borrowers without any hope of regaining equity would also be more inclined to default. Any FHFA policy must navigate between those two perils. VISIT US ONLINE @ DSNEWS.COM In his Brookings speech, DeMarco outlined the conditions under which principal forgiveness might work. "It would have to be clear and transparent," he said, "having a basis in the conservatorship mandate and a general acceptance of reasonableness if not fairness." The Bottom Line Eventually, the impossible expectations placed on this one loss mitigation tool will wane, and Edward DeMarco will continue his tedious task of unwinding the mortgage mess, one step at a time. But, grasping for a more poetic description of his task can lead to some unexpected humor: "What inspires you to get up every morning and go to work?" "My alarm clock." When the laughter subsides, Ed DeMarco reverts to form: "Honestly, I think it's what I said before; I've been a career public servant; I care deeply about this country, I care deeply about taxpayers and the opportunities for homeownership, and we've got a very important mission at FHFA. I'm dedicated to doing the best I can and the best that the agency can in carrying out that mission. That's what inspires us. There certainly are problems out there that need thoughtful and vigorous attention and response, and we're trying to deliver that." As his once university classmate, and now brother-in-law Michael Orton observes, "What you see on C-SPAN and elsewhere is what you get. That's Ed. There's not a hidden agenda. There's not an aspiring politician, there's none of that. He's just a very humble and very principled public servant. And that is so rare in our culture today that no one seems to know how to deal with it." "It would have to be clear and transparent, having a basis in the conservatorship mandate and a general acceptance of reasonableness if not fairness." – Edward DeMarco on principal forgiveness 49

• Cover