Photography: (Madigan) Courtesy of Lisa Madigan; (DeMarco) Courtesy of fhfa.gov
Looking to unlock the door to a tool that has been mostly kept out of the hands of struggling homeowners during the housing crisis, Illinois Attorney General Lisa Madigan last week joined the AGs of eight other states in calling for the firing of the man at the top of the Federal Housing Finance Agency.
They say the official, Edward DeMarco, has held back the housing recovery by blocking the widespread use of mortgage principal writedowns. They say a writedown is a key tool in preventing foreclosures, but DeMarco has opposed writedowns, arguing that they put taxpayers on the hook for individual homeowners’s losses.
His stance has kept Fannie Mae and Freddie Mac, the two major loan-guaranteeing Government-Supported Enterprises that his FHFA oversees, from offering principal reductions to the hundreds of thousands of homeowners facing foreclosure. The two back about 90 percent of US mortgages.
“Fannie Mae and Freddie Mac remain an obstacle to progress by refusing to adopt policies that will maximize relief for homeowners,” Madigan said in a prepared statement. “It is time for new leadership at the agency who will address the foreclosure crisis in a meaningful way to help bolster the nation’s economic recovery.”
Susan Ellis, an assistant attorney general in Madigan’s consumer fraud bureau, explains that principal reduction is one of several tools that can help a homeowner avoid foreclosure. “Where it makes sense to use principal reduction is often in places where there’s been a significant decline in the value of the home but the borrower still has a [steady] income,” she said. “If you take off some of that principal that is keeping them underwater, they’re much more likely to keep paying on the loan.”
Madigan came out against DeMarco a year ago. Ellis notes that “we’ve been trying for years to get him engaged and to change his policy.” She dates the struggle to 2008, when Madigan negotiated a deal with Countrywide Financial that was expected to result in about $185 million in principal writedowns for Illinois homeowners. Now, Ellis says, “we’re at the point where we hope a change in leadership” would result in support for writedowns.
DeMarco has frequently been at odds with the Obama administration on the issue of writedowns. Last July, then-Treasury Secretary Tim Geithner wrote to DeMarco that although the independent FHFA gets to make its own decisions, “I do not believe it is the best decision for the country, because, as we have discussed many times the use of targeted principal reduction by the [Government-Supported Enterprises] would provided much needed help to a significant number of troubled homeowners, help repair the nation’s housing market, and result in a net benefit to taxpayers.”
Calls for DeMarco’s head have been getting louder.
But DeMarco is still there.
And so is trouble for homeowners, Ellis says. Although the rate of foreclosure is dropping, it’s not dropping as fast in Illinois as elsewhere, as the Tribune reported earlier this month. And even though the Case-Shiller index data out yesterday brought the good news that Chicago-area home prices in January were up 3.3 percent from a year ago (and Chicago condos did even better, up 5.8%), Ellis says “It’s not too late” for principal writedowns to do any good.
“We’ve seen good news of late,” she said, “but our home values are still down from what they were pre-crisis and it’s going to take years for them to go up [to a point where] borrowers aren’t out there struggling to make their payments on underwater mortgages.”