Did DeMarco Make the Right Call on Home Loans?

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Edward DeMarco, the acting director of the Federal Housing Finance Agency, became a hero to some and an enemy to others Tuesday, after he refused to allow principal reductions on Fannie Mae and Freddie Mac home loans to underwater borrowers.

DeMarco tried to play a bit of a numbers game, saying the reductions were likely to increase losses to the government-sponsored enterprises and punish U.S. taxpayers, but his argument essentially hinged on moral hazard: The opportunity to decrease monthly payments could prompt some homeowners to strategically default on their mortgages, even if they could afford to pay them back.

Champions of this principle were quick to applaud DeMarco's decision as "courageous" and "correct."

 "This is the proper stance for the FHFA to take," one American Banker reader commented, while another added "Somebody has to put a stop to the moral hazard here."

But others were just as happy to cast DeMarco, who has been with the FHFA since its 2008 inception, as a villain. As Wednesday's Morning Scan points out, New York Times columnist Paul Krugman put up a post bluntly titled "Fire Ed DeMarco." Bloggers at Time, Bloomberg and Reuters were also critical of the FHFA director's refusal to offer borrowers this form of assistance.

While proponents of principal reductions are also apt to play with numbers – you'll find more than one article pointing out that the FHFA's own analysis found the program could potentially generate $3.6 billion in savings for GSEs – there seems to be a moral argument at play here too.

"We know that bailouts, subsidies, tax loopholes, and offshore havens do exist and benefit the privileged," one person commented on Krugman's blog. "But according to DeMarco, homeowners who were blindsided by the subprime feeding frenzy created by banks and Wall Street derivative pushers as well as the downsizing of America do not deserve relief."

Of course, an eye for an eye (or a bailout for a bailout) is a tricky argument to make no matter where you stand. As one person tweeted to BankThink, "basically DeMarco says homeowners will behave as crookedly as the banks." And, while there's no guarantee borrowers will strategically default on their loans, there's also no guarantee they won't.

What did you make of DeMarco's decision? What can or should be done to help beleaguered borrowers and bolster the mortgage market? Let us know in the comments section below.

Jeanine Skowronski is the deputy editor of BankThink.

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