DeMarco, interim director of the Federal Housing Finance Agency, won't instruct the government-owned companies to lower loan principals for distressed homeowners, as many banks nationwide have been doing.

Kamala D. Harris, attorney general for California, the nation's largest distressed real estate market, and many congressional Democrats want DeMarco replaced. Some have been especially sharp in their criticism.

"Here's some random idiot who ends up in charge of this agency, who is doing actual damage to the housing industry and my constituents," said Rep. Zoe Lofgren (D-Calif.) "He is intransigent, incompetent and should be removed."

Republicans don't agree that writing down loan principals would be worth the additional risk to taxpayers, but some also have been critical of DeMarco for not fully embracing their attempts to shut down Fannie Mae and Freddie Mac quickly or for not doing more to reduce executive pay.


For months, Obama administration officials, lawmakers and others have pushed DeMarco to direct the companies to reduce the amount owed on mortgages held by delinquent, underwater homeowners. Many economists have said that those principal reductions could stem the tide of foreclosures.


Despite his opposition to write-downs, DeMarco said he is considering new incentives from the administration that could make it less costly for Fannie and Freddie to reduce loan amounts. The incentives include increased financial aid to mortgage owners that agree to lower principal owed on home loans.


So far, DeMarco has argued that principal reductions would reduce the value of bad mortgages owned by Fannie and Freddie by about $100 billion, increasing losses on the huge taxpayer investments in the companies.

A wide-scale program also could encourage homeowners who have been making their payments to fall behind intentionally so they could get a reduction on their mortgages, he said.

Woah, woah, woah -- all good until the end there. It's absolutely INANE to argue that "principal reductions would reduce the value of bad mortgages" on Fannie and Freddie's books. Did you catch the contradiction? THE MORTGAGES ARE ALREADY "BAD" -- it's just that DeMarco and the powers-that-be are in denial about their, shall we say, lack of fundamental value. So this is basically an admission that principal reductions (we'll assume justifiable) would mainly be an acknowledgement of reality -- and we can't have that.

The final statement is also ridiculous. There is NO evidence that Americans in significant numbers are electively falling behind on payments. To the contrary, it is only when services trick them into stopping payments that they relunctantly do so (only to later get screwed, in most cases). Further, Americans could just walk away at any time -- they don't need to fall behind "to get a principal reduction" when they could at any time simply fall 100% behind to get a 100% principal reduction (effectively).

But the truth is, Americans do not want to scam banks and the GSEs to the extent they themselves were systemically scammed. They want an honest deal. They are more than willing (in fact, begging) to continue paying their mortgages if the burden is made affordable. A big chunk of that should be adjusting principals to realistic levels based on fundamentals.

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