By Kevin Chiu
The decision of the Obama Administration’s chief housing czar to reject principal mortgage reductions to underwater homeowners at risk of foreclosure is another blow to the U.S. housing market, and will result in at least 750,000 additional foreclosures, according to a Housing Predictor analysis.
The heated debate over forgiving mortgage principal is one of the most emotionally charged debates of our time. But the most important aspect of the argument is the good that mortgage reductions would do for the U.S. economy as a whole and neighborhoods in cities severely damaged by the foreclosure crisis. Each and every foreclosure financially damages the economy, and hurts neighborhoods and communities where the homes are located, sending property values lower for every homeowner.
It’s isn’t that forgiving principal is a good thing, but given the dire straits of the national economy, unemployment and the orchestration of Wall Street and the banks colluding against the U.S. consumer it is the best option given the selection of alternatives. Without principal mortgage forgiveness, more people will be forced to walk away from their homes because they cannot afford mortgage payments.
More mortgage holders will also feel it is hopeless to hold on to their underwater homes. A greater number of the underemployed will give up making mortgage payments they have struggled to pay each month, and more and more consumers will feel that the U.S. housing market will never recover in their lifetimes, leading to more negative sentiment.
This feeling, which is known as “the wealth effect” is the greatest issue standing between the government and homeowners. The “wealth effect” has been studied for decades by college professors and sociologists. Yet FHFA Acting Administrator Edward DeMarco saw little reason to improve this integral aspect of the housing market by endorsing principal reductions, which now inevitably delivers a severe blow to the housing market.
In the end, DeMarco chose “political correctness” over the good of all people with upcoming elections.
“FHFA has concluded that the anticipated benefits do not outweigh the costs and risks,” said DeMarco in a statement released on the FHFA website. “Given our multiple responsibilities to conserve the assets of Fannie Mae and Freddie Mac, maximize assistance to homeowners to avoid foreclosures, and minimize the expense of such assistance to taxpayers, FHFA concluded that HAMP PRA did not clearly improve foreclosure avoidance.”
As an Obama administration appointee, DeMarco missed the opportunity to help the “small guy” but instead chose to side with lenders who managed the overzealous lending practices to nearly destroy the U.S. economy. The money to pay for the program could come from the unused surplus of the Troubled Assets and Relief Program already approved by Congress.
The government was forced to takeover Fannie and Freddie and is now in the position of bailing out the lenders with at least another 750,000 foreclosures as a result.