Addressing the Weak Housing Market:
Is Principal Reduction the Answer?
Remarks as Prepared for Delivery
Edward J. DeMarco
Federal Housing Finance Agency
The Brookings Institution
April 10, 2012
Good morning. It is an honor to be here today.
Over the past six years many efforts have been launched by the federal government to stem the losses arising from the housing crisis and to keep people in their homes. Some programs have worked better than others, but almost all of them required trial and error, and were more difficult to actually implement than many had expected.
As conservator of Fannie Mae and Freddie Mac, the Federal Housing Finance Agency has been deeply involved in many of these efforts, and we have seen our share of successes and missteps. Today we find ourselves in the midst of a national debate regarding mortgage principal forgiveness: Would homeowners, the housing market, and the taxpayer be best served by providing outright forgiveness of mortgage debt for certain homeowners who currently owe more on their mortgage than their house is worth today?
I am grateful to the Brookings Institution for this opportunity to offer some perspectives on this debate and to provide some preliminary findings from FHFA’s most recent analysis of this issue. I will not be announcing any conclusions today – our work is not yet complete – but in view of the state of the public policy debate on this subject, I am pleased to have this venue to enhance the public understanding of this difficult question and to explain how FHFA has approached the matter. The Brookings Institution’s reputation as a home for thoughtful policy analysis and debate of challenging public policy questions makes this a most appropriate setting for this endeavor.
Typically when I begin a speech about Fannie Mae and Freddie Mac, or the Enterprises as I will refer to them, I set the context by reviewing FHFA’s legal responsibilities as conservator. I do so because I believe it is essential for people to understand that Congress considered the objectives it wanted FHFA to pursue as conservator. These objectives may not be easy to meet but they are clear – FHFA’s job is to preserve and conserve the assets of the Enterprises and, in their current state that translates directly into minimizing taxpayer losses. We are also charged with ensuring stability and liquidity in housing financing and maximizing assistance to homeowners.
Today however, I want to set the context for my remarks in a different way – I would like to begin with a few words on the human element of this housing crisis.
Throughout this crisis each of us know of, or have heard about, many individual stories of homes lost through foreclosure. One cannot help but have sympathy for those who have suffered such misfortune. And surely no one can look at the dislocations in the housing market and not feel frustration at how so many people and institutions failed us, whether through incompetence, indifference, or outright greed or fraud. Yet we are also blessed in this country with people and institutions who care, who are strongly motivated to provide assistance and find solutions.
The staff at FHFA has worked tirelessly since the Enterprises were placed into conservatorships to seek meaningful, effective responses to the housing crises. With the staffs at Fannie Mae and Freddie Mac, Department of the Treasury and Department of Housing and Urban Development (HUD), and numerous financial services companies, FHFA staff has sought to develop and improve on loan modification and loan refinance programs that bring meaningful options to struggling borrowers who want to stay in their homes. In a moment, I will describe these efforts and their progress to date. We know we have much more to do and the strategic plan for conservatorship that we submitted to Congress in February identifies that work as one of our three strategic goals.
There is another human element in this story that does not seem to receive much attention. Clearly, many households got over-extended financially. Some accumulated debts they couldn’t afford when hours or wages were cut or jobs were lost. Others withdrew equity from their homes as house prices soared. Others bought houses at the peak of the market, often with little money down, perhaps in the belief house prices would continue to climb. Yet there are other Americans who did not do these things. There are families that did not move up to that larger house because they weren’t comfortable taking the risk. Perhaps they had to save for college or retirement, and did not want to invest that much in housing. And there are people working multiple jobs, or cutting back on the family budget in many ways, to continue making their mortgage payments through these tough times. Many of these families are themselves underwater on their mortgage, even though they may have made a sizeable down payment.
Whichever of these categories any particular homeowner falls into, the decline in house prices over the last few years has reduced the housing wealth of all homeowners. The Federal Reserve has estimated that from the end of 2005 through 2011, the decline in housing wealth to be $7.0 trillion.
Six years into this housing downturn, the losses persist. The debate continues about how we as a society are going to allocate the losses that remain. Asking hard questions in this debate does not make one unfeeling about the personal plight this situation has created for so many. Indeed, the majority of those most hurt by this housing crisis did nothing wrong – they were playing by the rules but they have been the victims of timing or circumstance or poor judgment.
In short, the human element in this unfortunate episode in our country’s economic history stands out and commands our attention. Virtually every homeowner in the country has suffered a loss. But that doesn’t make the answers any easier. And it poses a deep responsibility on policymakers to weigh all these factors in seeking solutions, including the long-term impact on mortgage rates and credit availability of the actions we take today.
With that as backdrop, my goal today is to answer two questions:
1. What do the Enterprises do to assist borrowers through these troubled times in housing? and
2. How has FHFA assessed principal forgiveness as an option for assisting troubled borrowers?