By Kevin Chiu
Politics is a strange and nasty business and the business of walking the fence during this election year is increasingly damaging 
the U.S. economy. In order to help mend the economy, the U.S. will eventually make the tough but inevitable decision to cut principal on underwater mortgages, and take an estimated $100 billion tax payer housing loss.
The decision won’t come before November’s election since little ever gets done during election years in politics as contenders for the nation’s highest office square off and talk as little as possible about the real issues. It won’t come until well after the president is sworn into office for his new term. But it will slowly and painfully be enacted in order to help temper the troubled U.S. economy, which gets almost 25% of its GDP from real estate.
The Federal Housing Finance Agency (FHFA) started by the Obama administration defended its decision yesterday to exclude principal forgiveness as a loss mitigation tool on underwater mortgages. The response was made to criticisms made by a group of Democratic Congressmen headed by House Rep. Elijah Cummings (D-MY) and John Tierney (D-MA), who pushed for principal reductions as part of Freddie Mac and Fannie Mae’s loss mitigation efforts.
Acting FHFA Director Edward DeMarco defended the analysis, saying the agency never concluded that principal reduction never serves the long term interest of the tax payer. “Nearly 80% of underwater borrowers were current on their mortgages as of June 30, 2011,” said DeMarco. “Even for more deeply underwater borrowers, those with mark to market loan-to-value ratios above 115% – 74% are current.”
The problem at this point in the process is more about political posturing and pleasing voters than anything else. “An expenditure of this nature at this time would, in my judgment, require congressional action,” said DeMarco.
Getting the divided Congress to approve such a move on underwater mortgages in the current political climate would be impossible. Things have to get a lot worse in the country for Congress to take such a major step. After all, Congress is good at responding to emergencies and has little reason to act if it is not urgent.
The average bill takes seven years to work its way through the House and Senate to become law.
In the mean time, conservatively another million to two million homeowners will be forced out of their homes by foreclosure since they won’t be able to afford their underwater mortgages even at lower mortgage rates. Those foreclosures will take a heavier toll on the economy, costing tax payers more over the long protracted foreclosure process and the families involved without roofs over their heads to call home.