By Ken Gross, Host of the Financial Crisis Talk Show Radio Show on WDFN 1130 AM at 8:30 Saturdays (streaming at wdfn.com).
The Federal Housing Agency (FHFA) announced new Short Sale Standards and Guidelines for Fannie Mae and Freddie Mac that are effective November 1, 2012. Click here for the news release. The news is good for the housing market but somewhat of a surprise. Just 21 days earlier, Mr. DeMarco, the Head of FHFA announced that principal reductions on loan modifications would not be forthcoming on Fannie Mae and Freddie Mac backed or owned mortgages – which are estimated to cover 65% of the U.S. residential mortgages. This decision came in spite of his own agency’s recommendation supporting principal reductions, as well as the support of Treasury, the Administration and several leading economists.
DeMarco’s decision against principal reduction was primarily an unwarranted concern that homeowners who are underwater on their homes, would “game” the system in order to obtain a principal reduction on the mortgage as part of a modification and thereby retain the home. The notion, all by itself, is wrong. Anyone who is underwater – should do everything within their ability to find a pathway to exit the underwater status. There are only two options – either retain the home with a loan modification that reduces principal to or near the market value of the home; or short sell the home and eliminate the deficiency via the short sale. Doing so – is positive to the economy – not detrimental. Our economy is depends on consumer spending. Unless people have equity in their homes – there is no future for the return of home equity loans – which American’s use to fund their children’s education, vehicle purchases, and start up capital for new small businesses – all which drive the economy forward and create jobs. “Gaming” the system is not the issue. Anyone who does not seek such a solution is allowing the system to “game” them to a future of economic abyss.
So here is the anomaly. Short sales accomplish the same goal of allowing the homeowner to exit the house underwater – but in this case at higher, not lower, costs to the lender. Principal reductions with a loan modification do not need to be at the absolute market value. Most people would gladly accept a modification down to 115% of market value – so that they could keep their home, avoid moving costs and see in the relative short term a return to equity. The short sale, however, by definition is a sale of the property at market value and the lender receives less – as a result of selling costs on the property. So how does Mr. DeMarco explain why he is easing the restrictions and rules on short sales – while absolutely refusing to allow principal reductions? The issue of “gaming” the system is the same for both the short sale and principal reduction. Gaming is simply taking the smart steps to meet the necessary qualifications – whether short sale or loan modification it does not matter. So what is Mr. DeMaro’s reason to support one and not the other? My guess – is this is about saving face. Since DeMarco is on record for two years against principal reduction, it appears that the demands of his ego require that he avoid principal reduction at all costs – in spite of the clear need and logic.
So instead of allowing people the ability to retain their home and address the underwater problem, he’s willing to allow the problem to be addressed – as long as you sell the property.
Bottom line – this makes no sense, but it good news because at least one of two viable solutions to the housing crisis is now moving in a positive direction. One solution – is better than none!
Maybe in a couple of more months – ego will give way and we’ll have two solutions to solving the housing problem. Wouldn’t that be nice?