Explaining Southern California's economy

FHFA's Edward DeMarco doesn't give an inch on mortgage principal reductions

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California Attorney General Kamala Harris has called for FHFA head Edward DeMarco's termination over the agency's refusal to reduce principal on underwater loans.

Edward DeMarco, the acting director of the Federal Housing Finance Agency, isn't backing down when it comes to his long-held view that the two government mortgage giants, Fannie Mae and Freddie Mac, shouldn't reduce loan principal for underwater borrowers. 

In March, Fannie and Freddie produced an analysis that ProPublica's Jesse Eisinger wrote about. It suggested that the FHFA should be empowered to do principal reductions. 

But now the FHFA has released a new study, titled "Review of Options Available for Underwater Borrowers and Principal Forgiveness," that argues against principal reductions and in favor of another option, which I explained in a post that I wrote when I covered Eisinger's reporting:

DeMarco favors principle forbearance. The difference is simple: principal reduction takes a $400,000 mortgage on a home that's only worth $300,000 and writes it down to be a $300,000 mortgage. The $100,000 difference becomes a loss to the taxpayer, but it enables the homeowner to avoid default and provides him with an incentive to stay in the game.

Principal forbearance involves reducing the borrowers monthly obligation, much like in a writedown, but the size of the loan doesn't change. You have a $400,000 mortgage. House is worth $300,000. You can't make the payments and can't refinance because you're underwater. So you get to operate like your have a $300,000 mortgage for a while, but you're still responsible for the $400,000 total.

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