Allowing Fraud is in the Public Interest

A new study by mortgage behemoths Freddie Mac and Fannie Mae has ruffled powerful feather, from banking executives to the man in charge of administering the agencies after a takeover by the government during the mortgage crisis. Fannie and Freddie now control nearly 80% of all outstanding mortgages in the United States. The question: whether to reduce the amount of money beleaguered homeowners owe on their mortgages. I discussed this issue in a prior column some weeks ago.

Fannie and Freddie concluded that principal loan forgiveness would not only help people keep their homes, it would also save Freddie and Fannie money. Additionally, because the taxpayers have already provided Fannie and Freddie with over $150 billion in financing, it would also save the taxpayers money.

Unfortunately, several important figures remain hamstrung by the misguided notion that allowing principal reduction of underwater mortgages encourages wrongful and irresponsible behavior. Several economics professors as well as independent economists continue to cling to the idea that home buyers will allow their homes to go into default simply to take advantage of a principal reduction program, notwithstanding o evidence to support their position. More importantly, the now confirmed jackass, Edward DeMarco, who heads up the Federal Housing Finance Agency (FHFA), which oversees Fannie and Freddie continues to refuse to allow principal reductions as a means to even in the face of this new data that proves he is unquestionably wrong.

While new subsidies provided to Fannie and Freddie by the Obama administration allow for the federal government to pick up nearly 50% of any losses sustained through principal write downs, FHFA continues to cite ridiculous concerns such as changes to the computer system at Fannie and Freddie as reasons for its stubbornness.

The position of the FHFA as well as those charged with providing impartial economic advice to it is terribly disappointing. It is also repugnant to the ideas of fair play, and even sound business practices. This episode is simply more evidence that the Bush and Obama administrations’ purposeful cuddly relationship with the banks and insurance companies whose fraud caused the housing crisis and subsequent recession continues to prevent any real progress on this matter. The refusal to break up Citi will prove to be Obama’s Tora Bora with regard to the great recession. Its refusal to make any showing of force against the banking sector has made it nearly impossible since to extract what is due the American people in return for the illegal and irresponsible behavior which has cause so much pain, suffering, and death.