Morning Must-Read: Jared Bernstein: Principal Reduction is Still a Good Idea
I remember: It was the summer of 2008. The Bush administration had just seized the equity of Fannie Mae and Freddie Mac and put them into receivership not because there was any sign of a run on them as shadow banks but because their marked-to-market mortgage losses had blown through their equity and the Bush Treasury thought, quite reasonably, that since Fannie and Freddie were now playing 100% with Treasury money that the government should be the player. I was talking to Larry Summers. We agreed that we might well reach the point where the country might want to aggressively use Fannie and Freddie as tools of macroeconomic stabilization via large-scale resolution of underwater mortgages and subsequent rebalancing and reordering of housing finance, and that we broadly understood should be thinking about how to do this--and who would be good people to put in charge of the FHFA that was going to boss the GSEs in order to accomplish what its missions might turn out to be.
I have never understood why getting a good on-the-team administrator at the head of the FHFA was not Tim Geithner's first January 21, 2009 priority as head of the Treasury Department. I have never understood why he left do-nothing Ed DeMarco squatting at the FHFA like a toad for five years. This may well be Tim Geithner's and Barack Obama's largest unforced error...
Jared Bernstein reminds us that there is still a lot that could be done by the now Mel Watt-headed FHFA:
Jared Bernstein: Principal Reduction is Still a Good Idea: "I’ve been downright remiss in not continuing to hammer this....
This nice oped [by Peter Dreier]... reminds us that this is still an important intervention to clear the housing market and avoid more mortgage defaults.... The [anemic] housing recovery has hit a bit of a stall.... [My] key theme... back when [in 2009-10] was that Fan and Fred—the GSEs—could make a real difference here but... [Ed DeMaro at the FHFA] was stiffly resisting taking action. So I and others urged the White House to replace him. They’ve done so but still, nothing yet. From the oped:
The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, has refused to allow these two mortgage giants to reduce the principal on underwater mortgages that they own or guarantee. All it would take is for President Obama’s new appointee as F.H.F.A. director, former Representative Melvin Watt, to change the policy, an action that does not require congressional approval. He should do so immediately.