"F" The Bureaucracy - The White House Can Help Homeowners Right Now

Is a little-known bureaucrat named Edward DeMarco an unreasonable, ideological obstructionist who's blocking badly-needed homeowner relief? The White House says he is. So does Paul Krugman. Some of us having been harping on the subject for months.

Now the Administration says its hands are tied on a critical economic issue unless this lone bureaucrat has a change of heart. But there's plenty the White House can do without the man whose obscure agency's alphabet-soup name begins with the letter "F."

Item #1 on the list begins with an "F," too: Fire Edward DeMarco. But whether he stays or goes, there are a number of steps the Administration should be taking right now.

The issue at hand - reducing the amount owed on mortgages - can sound arcane, obscure, even wonkish. Words like "principal reduction," and "second mortgage" don't stir the soul as much as, say, "Give me liberty or give me death." But for millions of Americans, principal reduction is an issue of liberty, and sometimes even of life and death.

A Big "F"-in' Deal

A recent study showed that more homes are underwater than originally believed. Roughly 16 million borrowers owe the banks $1.2 trillion (with a "t") for real estate value value that no longer exists. We did some projections from that date to come up with the full scope of the problem and found that more than 40 million people live in those homes, with total mortgages outstanding of roughly $4.8 trillion.

Major principal reduction would reduce the monthly burden for millions of families. It would free up tens of billions of dollars - or hundreds of billions - reducing monthly payments substantially. Struggling households would then spend most of that money for things other than the unjust enrichment of wealthy bankers - consumer goods and services, mostly.

A broad principal relief plan would be the equivalent of a massive stimulus program, one that could create millions of jobs and help jump-start economic growth. And it would do it without costing the Federal government a cent.

Stop That Bureaucrat!

The Administration's actions for struggling homeowners have generally run the gamut from ineffectual or inept to downright cynical. Now the White House says it wants to do more, but there's a problem: Edward DeMarco. DeMarco's the Acting Director of the FHFA, the agency which took control of government-backed lenders Fannie Mae and Freddie Mac after their bipartisan-backed "privatization" led to an orgy of executive greed and incompetence.

Whether out of ideology or bank coziness, DeMarco has refused every entreaty for principal from detailed economic analyses to heartfelt moral appeals. As Paul Krugman notes today in a post called "Fire Ed DeMarco," DeMarco's latest move is outrageous. He's gone well beyond his agency's mandate to justify his inaction. As Krugman says, "deciding whether debt relief is a good policy for the nation as a whole is not DeMarco's job."

DeMarco's now the Administration's target of choice, with Tim Geithner playing the "good cop" role. "I urge you to reconsider this decision," Geithner wrote to DeMarco in genteel public memo whose mildness brought to mind Groucho Marx's remark to a gangster who was about to kill him:

"I'm not in the habit of making threats, Sir, but there'll be a letter about this in the Times tomorrow morning!"

Bizarro Jimmy Stewart?

Can one bureaucrat's intransigence stymie an entire Administration? If so then DeMarco's the Bizarro World version of Jimmy Stewart in Mr. Smith Goes to Washington, tie askew and sweat pouring down his brow, staging a one-man holding action against decent government.

The so-called "independence" of regulators is a complex topic for another day. What that usually means is that agencies become captive to the industries they regulate, leaving them "independent" only from the public that created them. But some doubt the whole story and say DeMarco's merely a foil.

Yves Smith says "Obama has never been serious about helping homeowners," and nothing in his Administration's performance refutes that. "DeMarco knows he won't be fired," writes David Dayen. "He's become the symbol in the story, and the Administration is much more interested in symbolism when it comes to housing."

Paul Krugman, on the other hand, argues that while 'the uncomfortable truth... is that the administration -- and Tim Geithner in particular -- seemed indifferent or even hostile to debt relief for a long time."

"That was a big mistake," adds Krugman. "But it's also in the past, and the administration has now seen the light."

So who's right ? The only one way we'll ever know one way or the other is if the Administration does something meaningful about principal reduction.

Quit "F"-ing Around

It can certainly do a lot more than write scolding letters. First, the President can fire DeMarco. Actually he doesn't even need to fire him, since he's only an Acting Director. He can simply make a recess appointment. The President might even be able to fire DeMarco for cause:DeMarco has willfully neglected a number of his agencies' responsibilities, which are clearly laid out on Fannie Mae's website and include "Reduce the number of foreclosures" and "Help families keep their homes."

Fire him for cause, Mr. President, and let the "CEO Candidate" try to tell the people why you shouldn't. Then turn your attention toward all underwater homeowners, not just those who would be helped by current proposals for FHFA-centered delinquent borrower programs.

That means addressing HAMP, the Administration's its cynically-nicknamed "extend and pretend" program, so it provides relief to more homeowners and no longer allows banks to manipulate, mislead, and provide usurious rates to their victims.

The White House can work with the Consumer Financial Protection Bureau or another appropriate agency to implement an aggressive "name and shame" policy toward banks that continue to rip off their customers, either through HAMP or independently.

The Administration must also shift the focus of its debt relief efforts away from delinquent borrowers and begin promoting broader solutions aimed at the wide universe of underwater homeowners. One of DeMarco's few legitimate criticisms of White House policy hinges on the fact that homeowners reap benefits from falling behind on their payments, which could encourage more of them to do the same.

That's true. it also feeds into popularly-held biases against principal reduction, and discriminates against those who have kept up with their payments. Helping delinquent homeowners is arguably another way of helping banks in the guise of helping ordinary people, whereas broader relief might force the banks to step up.

Which leads to another important job for the President, one that doesn't require the approval of any "F"-in' bureaucrat: He can make the moral case for America's homeowners in a clear, strong voice. So far he hasn't done that - partly because some key members of his team buy into the unfair notion that underwater homeowners, unlike Wall Street bankers, don't deserve to be helped.

The Undeserving

You can skip this section if you like, but it might be worth a quick refresher course on how we got here: A home is "underwater" when the borrower owes more than the house is worth on today's market.

How did that happen to so many people? Banks knowingly pushed home loans on people who couldn't afford the "balloon" payments hidden in the fine print. Other borrowers were suckered by deceptive techniques that ranged from general proclamations ("a home is your best investment") to individual scams (i.e., using crooked adjusters to inflate the home's values, burying unaffordable provisions in massive and unreadable loan documents, encouraging the falsification of loan documents).

The banks then packaged these junk loans into "mortgage-backed securities," often fraudulently misrepresenting them as higher-grade investments. Then they made massive profits from the ensuing bubble in housing value - a bubble which, given their legions of paid economists and analysts, they should have would collapse. Instead they kept loosening their standards, writing riskier and risker loans, bundling more and more loans into deceptive securities - and collecting bigger and bigger bonuses.

When the entire edifice came crashing down the banks took trillions in loan relief in a way that amounted to billions in outright gifts from the taxpayer. They then entered into a massive wave of foreclosure fraud to evict those same borrowers from their homes - fraud which included mass perjury, forgery, and other crimes. The executives who had supervised this entire process all kept their jobs - and their bonuses.

But when it came time to offer principal reduction to their victims - the chance to reduce the amount owed to something closer to market value - they and their Washington friends cried that this assistance, which would provide great relief from the damage they inflicted on the economy, would be "unfair."

The billionaire bankers and those who rescued them even said - get this - that asking them to adjust these debts would "reward the undeserving."

Brought To You by the Letter "F"

So there's something else the President can do without Edward DeMarco's permission, and its importance shouldn't be minimized: He can clearly and forcefully explain the massive injustice that's been done to these homeowners. (See our "Moral Hazard Scorecard" for more details.)

The President can demand justice. He can tell Wall Street he'll do everything in his power to restore justice - and we mean everything. Many people remember Franklin D. Roosevelt's heated war of words with Wall Street. ("I welcome their hatred!") Far fewer recall how bankers stung by FDR's rhetoric and fearful of public rejection voluntarily pledged to do more - and did. Rhetoric matters.

With or without Edward DeMarco, the White House can take concrete steps to help homeowners - and it can use the President's "bully pulpit" to fight back against the bullies. The only way homeowners will know that the Administration's doing something for them is when it does something - really does something.

If the President and his team move aggressively on principal reduction, their actions won't just help underwater homeowners: they'll also help the whole economy. That could prevent the President and his party from getting the grade that all politicians dread at election time - an "F."