Why is Ed DeMarco stopping mortgage refinancing?<\/a><\/h2>\n![\"\"](\"https:\/\/i0.wp.com\/www.washingtonpost.com\/blogs\/ezra-klein\/files\/2012\/07\/demarco.jpg?resize=300%2C196\")
Remember Ed DeMarco? He runs the Federal Housing Finance Agency, which was created in 2008 after the government\u2019s takeover of Fannie and Freddie as an independent regulator of those firms. For the past year, he has been\u00a0under pressure<\/a>\u00a0from\u00a0liberal groups<\/a>, congressmen like\u00a0Barney Frank<\/a>\u00a0and economists like\u00a0Mark Zandi<\/a>\u00a0to 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\u2019s top economic advisers, has\u00a0proposed<\/a>\u00a0a plan along these lines. Or he could have let Fannie and Freddie borrowers use the Treasury\u2019s principal reduction plan, HAMP, so they\u2019re paying interest on less mortgage.<\/p>\nBut today, after months of pressure to take such action, DeMarco\u00a0ruled the latter out<\/a>,saying<\/a>\u00a0(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\u00a0fire DeMarco<\/a>. 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?<\/p>\nDeMarco 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\u2019s a \u00a0substantial amount of money that each of the 30 million families with Fannie or Freddie mortgages would save on their payments every month. Hubbard\u00a0estimates<\/a>\u00a0(pdf) that the average borrower would save $2,800, and that the total savings would come to $70 billion.<\/p>\nIt would function, effectively, like a $70 billion tax cut, albeit one that actually makes Fannie and Freddie money. Most studies\u00a0suggest<\/a>\u00a0that tax cuts have a stimulative multiplier, meaning the economy would grow by more than $70 billion. Zandi, for instance,\u00a0estimates<\/a>that 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\u2019s\u00a0growth<\/a>\u00a0of about 0.56 percent, based on the latest GDP data, whichtranslates<\/a>\u00a0to about 0.28 percent lower unemployment. That\u2019s not huge, but given the\u00a0size of the labor force<\/a>, it\u2019s around 370,000 new jobs.<\/p>\nSo why hasn\u2019t DeMarco done it, or the HAMP plan? He argues that they would lose taxpayers money.<\/p>\n
There are two problems with that explanation. One, that isn\u2019t how DeMarco, under the statute creating the FHFA, is supposed to be exercising his authority. He is supposed to protect Fannie and Freddie\u2019s finances, to\u00a0ensure<\/a>\u00a0(pdf) that they are \u201cin sound and solvent condition,\u201d not to prevent net losses of taxpayer money. Two, it\u2019s not even clear he\u2019s correct. As Krugman notes, DeMarco\u2019s analysis fails to take into account the benefits to Fannie and Freddie of the economic growth resulting from the plan, a pretty glaring omission.<\/p>\nSo 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 \u201cimplement a plan that seeks to maximize assistance for homeowners.\u201d The Treasury Department could easily argue that failing to implement a refinancing plan constitutes an abdication of that duty.<\/p><\/blockquote>\n
Remember Ed DeMarco? He runs the Federal Housing Finance Agency, which was created in 2008 after the government\u2019s takeover of Fannie and Freddie as an independent regulator of those firms. For the past year, he has been\u00a0under pressure<\/a>\u00a0from\u00a0liberal groups<\/a>, congressmen like\u00a0Barney Frank<\/a>\u00a0and economists like\u00a0Mark Zandi<\/a>\u00a0to 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\u2019s top economic advisers, has\u00a0proposed<\/a>\u00a0a plan along these lines. Or he could have let Fannie and Freddie borrowers use the Treasury\u2019s principal reduction plan, HAMP, so they\u2019re paying interest on less mortgage.<\/p>\nBut today, after months of pressure to take such action, DeMarco\u00a0ruled the latter out<\/a>,saying<\/a>\u00a0(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\u00a0fire DeMarco<\/a>. 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?<\/p>\n 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\u2019s a \u00a0substantial amount of money that each of the 30 million families with Fannie or Freddie mortgages would save on their payments every month. Hubbard\u00a0estimates<\/a>\u00a0(pdf) that the average borrower would save $2,800, and that the total savings would come to $70 billion.<\/p>\n It would function, effectively, like a $70 billion tax cut, albeit one that actually makes Fannie and Freddie money. Most studies\u00a0suggest<\/a>\u00a0that tax cuts have a stimulative multiplier, meaning the economy would grow by more than $70 billion. Zandi, for instance,\u00a0estimates<\/a>that 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\u2019s\u00a0growth<\/a>\u00a0of about 0.56 percent, based on the latest GDP data, whichtranslates<\/a>\u00a0to about 0.28 percent lower unemployment. That\u2019s not huge, but given the\u00a0size of the labor force<\/a>, it\u2019s around 370,000 new jobs.<\/p>\n So why hasn\u2019t DeMarco done it, or the HAMP plan? He argues that they would lose taxpayers money.<\/p>\n There are two problems with that explanation. One, that isn\u2019t how DeMarco, under the statute creating the FHFA, is supposed to be exercising his authority. He is supposed to protect Fannie and Freddie\u2019s finances, to\u00a0ensure<\/a>\u00a0(pdf) that they are \u201cin sound and solvent condition,\u201d not to prevent net losses of taxpayer money. Two, it\u2019s not even clear he\u2019s correct. As Krugman notes, DeMarco\u2019s analysis fails to take into account the benefits to Fannie and Freddie of the economic growth resulting from the plan, a pretty glaring omission.<\/p>\n 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 \u201cimplement a plan that seeks to maximize assistance for homeowners.\u201d The Treasury Department could easily argue that failing to implement a refinancing plan constitutes an abdication of that duty.<\/p><\/blockquote>\n