The decision on Tuesday by a top housing regulator to shut the door on principal forgiveness for underwater mortgages dealt a major setback to an initiative sought by President Obama and congressional Democrats.
There has been speculation recently that the Federal Housing Finance Agency might allow some principal reductions, but any move would likely have had a modest impact on the housing market at best. Still, the rejection of the policy denies Obama and Democratic lawmakers even a shallow housing victory that they might otherwise have been able to highlight on the campaign trail in the fall.
The timing comes as Congress gets ready to adjourn for a summer recess, giving Democratic lawmakers little leeway to react. Democrats will not be able to force the FHFA’s acting director, Edward DeMarco — a holdover from the Bush administration — to appear on Capitol Hill to answer questions about the impact of his agency’s decision until the fall. Nor can Democrats try to advance pending housing legislation to streamline refinancings until they return in September for a short session, where it will be practically impossible to enact controversial bills before Congress breaks again to campaign for the November elections.
“We are down to the point where it’s what you see is what you get for the administration’s defense on the lousy housing environment,” said Charles Gabriel, an analyst with Capital Alpha Partners. “It’s a disappointment to the Democrats. They will now go into the homestretch for this election cycle with much less insulation than they would have liked…. Any additional hopes of insulation against this negative housing environment, either through legislation or regulation, is pretty much dashed at this point. The combination of those two things is symbolically important.”
Republicans applauded FHFA’s decision, saying it prevents the administration from using housing finance giants Fannie Mae and Freddie Mac, known as "government sponsored enterprises," to further its agenda on housing.
“I praise Director DeMarco’s decision to protect the American taxpayer by preventing the Obama Administration from continuing to exploit the bailout of the GSEs to push their own social housing goals,” said Rep. Scott Garrett, R-N.J.
Analysts had not expected a seismic shift in the state of the housing market even if the FHFA did decide to allow some principal forgiveness for a certain set of homeowners with loans backed by Fannie Mae and Freddie Mac.
DeMarco, the FHFA’s acting director, said in a speech in April that an analysis by his agency had concluded that there would only be a small subset of loans in which principal reduction might benefit the taxpayer by reducing the GSEs’ expected losses on likely foreclosures.
According to the FHFA’s updated analysis released on Tuesday, there would only be a $1 billion benefit to the taxpayer if a specific set of 500,000 underwater borrowers were forgiven some of their mortgage principal. The agency said that in reality perhaps only a half or a quarter of those eligible would be reached, further reducing any financial benefit to the taxpayer.
That action could have reduced foreclosures and brought financial benefits to homeowners, mortgage investors, and mortgage insurers. But on its own, it probably would not have done much to shore up home prices, boost sales, or otherwise jolt the housing sector, analysts said.
“Given the likely limited reach, it would not have that significant an impact on the economy as whole,” said Laurence Platt, a real-estate finance lawyer with K&L Gates. “It would have a tremendous impact on the borrowers who got the benefit, and to the extent that it would help create a new standard that other lenders might use, that would be useful.”
Last summer, Obama acknowledged that his administration’s housing efforts had fallen short of his hopes and he directed his team to show more aggressive and nimble action to restart the housing market and provide relief for struggling homeowners.
The administration pressed to reduce red tape blocking refinancings last fall and made more progress on that front through administrative changes to the Home Affordable Refinance Program, run by FHFA, this year.
Still, the administration has sought further action that it is now unlikely to achieve.
Obama laid out several housing initiatives in February, including suggesting that the FHFA allow principal reductions and that Congress pass legislation to expand refinancings.
Treasury Secretary Timothy Geithner and Housing and Urban Development Department Secretary Shaun Donovan had both leaned on DeMarco to give ground.
Geithner vented the administration’s frustration on Tuesday, telling the regulator in a letter, “You have the power to help more struggling homeowners and help heal the remaining damage from the housing crisis. I hope you will move to address these problems.”
Donovan has delivered speeches calling on Congress to pass the administration’s housing legislation, which is sponsored in a series of bills from Sens. Robert Menendez, D-N.J., Barbara Boxer, D-Calif., Dianne Feinstein, D-Calif., and Jeff Merkley, D-Ore.
For months Menendez has been trying to get a vote, either in the Senate Banking Committee or on the Senate floor, on his bill that would streamline HARP refinancings, and he is expected to continue to press for that when lawmakers return.
But the bill has uncertain odds of passage in the Senate and is not expected to be taken up in the Republican-controlled House, leaving Democrats with little more than an opportunity to blame the GOP and others like DeMarco for blocking their efforts.
Niraj Chokshi contributed