The FHFA Could Help Debt-Burdened Homeowners – and the US Economy – But Won’t

…from Dylan Matthews at Wonkblog last night:

Why is Ed DeMarco stopping mortgage refinancing?

Remember Ed DeMarco? He runs the Federal Housing Finance Agency, which was created in 2008 after the government’s takeover of Fannie and Freddie as an independent regulator of those firms. For the past year, he has been under pressure from liberal groups, congressmen like Barney Frank and economists like Mark Zandi to use that authority to help homeowners. He could, for instance, allow a mass refinancing of mortgages, granting a reprieve to families that are underwater (that is, owe more than their homes are worth). The effect could be a substantial stimulus, one which members of both parties support. Glenn Hubbard, one of Mitt Romney’s top economic advisers, has proposed a plan along these lines. Or he could have let Fannie and Freddie borrowers use the Treasury’s principal reduction plan, HAMP, so they’re paying interest on less mortgage.

But today, after months of pressure to take such action, DeMarco ruled the latter out,saying (pdf) it was too risky. The decision prompted a letter from Treasury Secretary Tim Geithner condemning the move. Paul Krugman has called on the administration to fire DeMarco. All of which raises the questions: What could DeMarco do if he wanted to help the economy? And can Obama fire DeMarco, even if he wants to?

DeMarco just rejected the HAMP plan, but the refinancing plan would be a more dramatic, and effective, move. The key to that plan is the fact that the vast majority of mortgages backed by Fannie and Freddie are paying interest rates above 5 percent, well above current interest rates of about 4 percent. If the mortgages were refinanced, that’s a  substantial amount of money that each of the 30 million families with Fannie or Freddie mortgages would save on their payments every month. Hubbard estimates (pdf) that the average borrower would save $2,800, and that the total savings would come to $70 billion.

It would function, effectively, like a $70 billion tax cut, albeit one that actually makes Fannie and Freddie money. Most studies suggest that tax cuts have a stimulative multiplier, meaning the economy would grow by more than $70 billion. Zandi, for instance, estimatesthat low-income tax cuts (and refinancing would disproportionately help low-income families) have a multiplier of about 1.24, so the total economic impact could be around $86.8 billion. That’s growth of about 0.56 percent, based on the latest GDP data, whichtranslates to about 0.28 percent lower unemployment. That’s not huge, but given the size of the labor force, it’s around 370,000 new jobs.

So why hasn’t DeMarco done it, or the HAMP plan? He argues that they would lose taxpayers money.

There are two problems with that explanation. One, that isn’t how DeMarco, under the statute creating the FHFA, is supposed to be exercising his authority. He is supposed to protect Fannie and Freddie’s finances, to ensure (pdf) that they are “in sound and solvent condition,” not to prevent net losses of taxpayer money. Two, it’s not even clear he’s correct. As Krugman notes, DeMarco’s analysis fails to take into account the benefits to Fannie and Freddie of the economic growth resulting from the plan, a pretty glaring omission.

So can Obama fire him? Unclear. As Brad and Ezra noted in their profile of DeMarco last summer, the FHFA director can only be fired for cause. But then again, the FHFA is under a mandate to “implement a plan that seeks to maximize assistance for homeowners.” The Treasury Department could easily argue that failing to implement a refinancing plan constitutes an abdication of that duty.