It’s Time for Obama to Fire DeMarco—Will He?

Fannie Mae and Freddie Mac won’t reduce the principal of underwater homeowners—FHFA head Edward DeMarco made that official yesterday. Despite the fact that FHFA analysts concluded this week that forgiving certain mortgage debts could save public money, DeMarco said yesterday he would not allow it because of the “costs and risks”—he is particularly concerned that people might strategically default to qualify for help.

This is a nonsense argument—as Treasury Secretary Timothy Geithner pointed out in a letter [pdf] to DeMarco yesterday, strategic default is an incredibly risky strategy:

A borrower who defaults cannot be certain that he and she will obtain a HAMP modification, much less…principal reduction. Therefore, a borrower would take a substantial risk be deliberately defaulting: they would have to choose to damage their credit for years to come and perjure themselves on the chance that they would be found eligible for the program.

Ed DeMarco's Refusal on Principal Reductions Grounds for Firing

The single largest obstacle to meaningful economic recovery is a man who most Americans have probably never heard of, Edward J. DeMarco.

From his perch as acting director of the Federal Housing Finance Agency, DeMarco oversees Fannie Mae and Freddie Mac, the government-owned mortgage behemoths that collectively control about half of all home loans in the land. What he does shapes both the national housing market and the ability of troubled borrowers to hang on to their homes. What he has been been doing lately has been so unhelpful that Democratic lawmakers and grassroots advocacy groups are properly demanding his ouster.

DeMarco steadfastly refuses to allow Fannie and Freddie to help distressed homeowners by writing off principal balances on their mortgages. This has ensured that tens of millions of borrowers remain "underwater," meaning they owe the banks more than their homes are worth -- a status that has an alarming tendency to portend foreclosure. His refusal is based on logic that is both elegantly simple and tragically flawed: He is responsible for cleaning up the books at Fannie and Freddie, so he is against spending money.