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April 13, 2012

A Couragious Man in Our Nation’s Capital

President Obama has a plan for reelection. And it’s going to cost the American taxpayer an arm and a leg. Whether it’s free food, free money for green enterprises, free college money, or even free contraceptives, this president knows how to garner votes. If he could only force Macy’s to provide free clothing, he’d have all the basic needs covered.

His latest gambit is a free bail-out from mortgages that have gone south. Edward DeMarco, acting director of the Federal Housing Finance Agency, has been doing the unthinkable: he’s been telling President Obama and his sycophants “no.” He’s been reducing mortgage payments for troubled borrowers by lowering interest rates or tacking principle onto the end of the mortgage term, but so far he has refused to write-down the principle amount. Somehow he has gotten it into his head that a major part of his job is protecting the taxpayer. If an underwater loan is written down, two things will immediately happen.

First, a loss will have to be posted to Fannie Mae and Freddie Mac’s books. Since the two mortgage giants are operating on the taxpayers’ dime (Actually over $150 billion to date) and they climb Capitol Hill on a quarterly basis to beg for more money, it would seem increasing their losses may not be good business or politics. After all, the hoi polloi seem disinclined to vote for spendthrift congressmen.

The second thing that happens is that there is no recourse to recover the money – ever. For example, if some ne'er-do-well gets one of these loan write-downs and Obama’s economic policies miraculously begin working, taxpayers will never recover any money from an improved housing market. When the house is sold, profits will go to the lucky recipient of the government largess. Having learned his lesson, this paragon of virtue will use a pristine credit rating to buy a larger home, probably after thumbing his nose at his bewildered neighbors.

DeMarco’s position has been that his hands were tied because he has a fiduciary responsibility to protect taxpayers from further losses. For months, Obama and his minions have been throwing everything but the kitchen sink at DeMarco, browbeating him before congressional committees, vilifying him in the press, and inciting activists to demand his resignation. But he has continued to resist. And then he made a fatal error. He said he would consider principle write-downs if they would not increase the losses for Fannie or Freddie.

Big mistake. Huge mistake. These were, after all, the same people who claimed they could provide medical coverage for 40 million uninsured while simultaneously reducing the deficit by $170 billion. Treasury secretary Timothy Geithner, who knows something about saving taxes, had $3.8 billion excess TARP funds burning a hole in his pocket. I’m sure with a little encouragement he was persuaded that the absolute best use for this money was to give it to underwater mortgage holders. With great fanfare, the Treasury said they would pick up the tab and Fannie and Freddie would be kept whole. Some gnome with a bent slide rule calculated that the two mortgage giants could save $1.7 billion by reducing loan balances. Problem solved. Mr. DeMarco’s fiduciary responsibility is protected and the housing industry is instantly launched onto a recovery path that will boost President Obama chances for a second term.

The savings calculation includes a bevy of questionable assumptions, but one is a doozey. These paper-thin savings assume that all the other homeowners behave like good American citizens. According to the Wall Street Journal1, if only 1-5% of homeowners stop paying because they want to jump on the gravy train or they’re just mad at their irresponsible neighbor, loses will climb through the Capitol dome. Shaun Donovan, the secretary of the U.S. Department of Housing and Urban Development dismisses the risk by saying, “The vast majority of homeowners don’t operate that way.” He doesn’t mention whether 95% represents a vast majority.

But from a taxpayer’s perspective, the whole argument is bogus anyway. The money Fannie and Freddie supposedly save is being covered by Treasury. For the uninitiated, this is the same place Congress goes to get money when Fannie and Freddie make their quarterly pilgrimage to the Hill. But wait, it gets worse. In order to build confidence in the housing market the Treasury and Federal Reserve have been buying huge piles of securities issued by Fannie and Freddie. According to Demarco’s congressional testimony, “This combined support from the federal government exceeds $1 trillion and has allowed Fannie Mae and Freddie Mac to continue providing necessary liquidity to the mortgage markets”.2 This is above and beyond direct subsidies, but more important, it means we are the holders of the mortgage they want to write down. So even if Freddie and Fannie manage to keep their books clean, American taxpayers end up holding the bag.

If memory serves, this is the same way we got into this awful financial mess. So far, Demarco is holding firm. We should all go to sleep praying for Edward DeMarco. He’s one of the few brave souls standing between us and a financial apocalypse.

James D. Best is the author of Tempest at Dawn. Look for his new book, Principled Action, Lessons from the Origins of the American Republic.

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1 Wall Street Journal Wednesday, April 11, 2012, ECONOMY Boost for Loan Write-Downs By Nick Timiraos


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