A Public Official Who Puts The Public First

If you were a career bureaucrat under heavy pressure from the president and his Treasury secretary to hand out millions of public dollars to people with underwater mortgages, would you stand up for taxpayers – or would you go along with the plan in order to get along with your bosses?

Edward DeMarco has a lot of strengths. Getting along apparently is not one of them, for which the rest of us ought to be grateful.

There are plenty of conscientious government officials, and it is unfair to say that most are concerned primarily with keeping their current jobs and seeking appointments to bigger jobs. But look at the top of the political heap and you will certainly find some who seem to fit that description. I’ll nominate Treasury Secretary Timothy Geithner for the list. In four years, Geithner has gone from the technocrat in charge of the Federal Reserve Bank of New York to chief apologist for the administration’s send-them-a-check theory of how economies grow, which would be fine if that theory had actually accomplished anything significant in the past four years. But Geithner and his colleagues in the administration chronically assure us that they are one big check short of success.

This is where DeMarco, the acting director of the Federal Housing Finance Agency, enters the picture.

For more than a year, the Obama administration has pressured DeMarco’s agency, which oversees Fannie Mae and Freddie Mac, to reduce principal for borrowers who are behind on their mortgage payments and who owe more than their homes are worth. The administration has provided hearty incentives for offering this sort of debt forgiveness, and nearly every major mortgage company has taken the bait.

Under the debt-forgiveness initiative, which is part of the Home Affordable Modification Program, qualifying homeowners’ principal balances are cut in installments over the course of three years. So far, principal reductions have averaged $69,000. If Fannie Mae and Freddie Mac offered the program, 74,000 to 248,000 borrowers might qualify, the FHFA has estimated. Other government estimates put the number as high as 500,000.

But Fannie Mae and Freddie Mac will not offer debt forgiveness, because DeMarco refuses to authorize it.

According to the administration, debt forgiveness is good for mortgage companies, because it prevents borrowers from defaulting and thus stopping payment altogether. DeMarco’s agency estimated the potential savings from averted defaults at up to $500 million. The Treasury says the savings could be as much as $1 billion.

But DeMarco’s agency went on to point out that the incentive also encourages people who are not currently behind on their mortgages to intentionally miss payments in order to qualify for the program. Only 3,000 people would need to do this for the program to become a net loss, DeMarco calculated.

The real issue, however, is not whether Fannie and Freddie would make or lose money on the deal. “The projected impact could be negative for taxpayers or it could be positive, depending on the assumptions,” DeMarco told reporters. The real issue is whether debt forgiveness is good for the housing market and the country. DeMarco has decided that it is not, and I agree.

The administration justifies debt forgiveness on the grounds that it prevents foreclosures. Stopping foreclosures at all costs has long been one of the administration’s foremost goals. Handing over free money to people who can’t afford to pay their mortgages is as good a way as any of keeping them in their homes.

But keeping people in homes they can’t afford is not going to fix the housing market. As I’ve written before, for the housing market to move forward, many individuals and families are going to have to move as well. Those who are in homes they can’t afford will have to move to homes they can afford, either by buying more modest properties or by renting. Others, who can afford the newly-opened-up homes, will need to move into them. In markets that have already seen a lot of foreclosures, notably the Phoenix area, we have begun to see clear signs of a housing rebound as a result.

Foreclosure certainly is unpleasant for those involved, but it is not the ultimate evil the Obama administration presents it as. People who can’t pay their mortgages will not be sent to debtors’ prisons. They will not become homeless. They will simply become owners of smaller homes or renters – which, after all, is just a name for people who don’t pay mortgages.

The administration has made a few good moves in trying to mitigate the effects of the housing crisis for individuals. I agreed with the president’s decision to expand the Home Affordable Refinance Program (HARP) to allow more borrowers who have kept up with their mortgage payments to refinance and take advantage of lower interest rates, even though their home values have dropped to a point that would ordinarily make it impossible for them to refinance. Fannie Mae already has used the expanded HARP guidelines to make refinancing available to all borrowers, regardless of their loan-to-value ratio, and Freddie Mac is poised to follow.

DeMarco’s decision did not make him any friends in the White House, nor has it made him more popular with Fannie and Freddie borrowers, who will continue to pay their full principals while other borrowers get reductions. It should, however, earn him the respect and gratitude of taxpayers. This column is my way of saying thank you.

About Larry M. Elkin 564 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

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