Mel Watt’s FHFA Appointment and Principal Reduction

May 10, 2013

Jason Hughey

Last week, President Obama appointed Congressman Mel Watt from North Carolina to be the new director of the Federal Housing Finance Agency (FHFA).  If Congress confirms Watt’s appointment, he will replace FHFA’s acting director, Ed DeMarco.  This is a major development for federal housing policy because Watt will likely reverse DeMarco’s stance against principal forgiveness on underwater home loans.

Many homeowners still have homes that are worth less than what they owe on their home loans.  When the housing bubble burst, home prices tanked, leaving these homeowners in this “underwater” condition.  In order to alleviate their financial woes, the Obama administration favors a policy known as principal reduction.  Under this policy, the federal government would subsidize loan servicers, such as banks, so long as the servicers “forgive” some or all of the principal payment on underwater loans.  Individuals would only be required to pay remaining interest payments.

AFP opposes this harmful intervention in housing.  The federal government has been far too involved in the housing market already, trying to make home loans easily affordable to homebuyers.  The goal was to give every American a shot at owning a home.  In 2008, that vision came crashing down as the artificially pumped up housing market collapsed.  Putting people in homes they could not afford was a significant part of the financial crisis.  The policy of principal reduction rests on the same assumptions that drove housing policy to fail last time.

This makes Rep. Watt’s nomination troubling because he actively supports the idea that government should subsidize home ownership.  For example, Watt worked closely with Rep. Barney Frank to keep Fannie and Freddie over-exposed in the subprime mortgage market.  He also helped pilot a program called “Pathways to Homeownership” that targeted low-income individuals with subprime loans.

And of course, he strongly supports a policy of principal reduction.

In comparison, DeMarco has long opposed principal reduction.  DeMarco understands that such a policy is a government intervention that robs Peter the taxpayer in order to pay Paul the homeowner.  It’s his job to decrease the taxpayer’s burden and thus far, he’s been working to accomplish that.

However, Rep. Watt has less care for sound policy prescriptions.  He is a politician who views housing policy from a decidedly partisan position.  He has little regard for the concerns of taxpayers and their already exorbitant tax bill.  This is not the attitude that Americans should desire from any potential nominee for any political position.  AFP will remain opposed to the policy of principal reduction as Rep. Watt’s nomination moves forward.

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