All the reports say that principle reduction is less expensive than foreclosure costs. And for good reason. It costs on average of $30k per home for the bank to deal with the REO.
Factor in the fact that the banks have been working with the gov to kickstart this economy by NOT dumping all of that REO into an ascending housing market and recovery.
Banks and gov should prevail as per my recent post as having shirked blame and responsibility in favor of how public will receive thm based on the next move.
The gov gets to say, we misunderstood sorry.
The banks get to say we were bad but here is some money go out and do something with it. Then they will start to unload REO at higher rates while limiting downside on existing loans with forbearance and principle reduction.
Principal reduction is a minor issue when considering reform of the entire housing finance system.
Principal reduction can made by the FHFA (Acting) Director while in the conservatorship or before it is released from the conservatoship. The FHFA actions have the authority of and count as federal law.
What is not being considered here, is that while in the conservatorship, all operational modifications outside of the monetary and financial ones controlled by the US Treasury by law are made by the Acting Director DeMarco or any future Director and not directly by the Congress or the President. There is no way that I know of that the Congress can legislate changes in or eliminate the GSEs while in the conservatorship or that allows the President to make direct changes to the conservatorship. Neither have legal authority to do that. That is why nothing happens unless DeMarco says it happens and why the President has so far made two nominations to replace him. One failed (Joseph Smith). The other, Melvin Watts has a steep uphill climb to be confirmed.
If the Congress and the President did have such authority how is it that for 4.5 years they have not exercised it? The banks are no different.
All are outside of the FHFA as an independent federal agency, which by law has sole governing powers over the GSEs. All others defer to the law though they make noises that make them look as if they have a direct say or authority to do something. They simply do not and the evidence is that they have done nothing other than watch the actions of DeMarco and Lew and try to influence them from outside the FHFA.
So whatever bills are made they can never be directly applied to the GSEs while they are in the conservatorship.
The worst case scenarios with the GSEs outside of the conservatorship are:
1. The GOP will eliminate and liquidate the GSEs as proposed by the Corker Warner Draft Bill and Hensarling Bill. A legislative solution.
2. The Democrats will turn the GSEs into a full and complete government agency. This is a proposal raised by the GOP for the Democrats and there is no current basis for this idea in any Democrat housing agenda to date. The White House options are for restructuring and privatization.
In any case, in both of those extreme scenarios, shareholders do not win.
However, while in the conservatorship, the GOP will not have the chance eliminate the GSEs through legislation. Outside of it, they do, If the GSEs are not protected when released from legislative intervention. So, the conservsatorship is protective and unfortunately while being protected it has been a cash cow for the present administration the US Treasury stock purchase agreements. That constitutionality of that position will soon be challenged in court and it is anticipated that when dividend given equal draws taken the agreements will be amended or rescinded.
Also. the idea that the GSEs will become a government agency is baseless. The conservatoship statutory provisions and FHFA law do not allow that unless GSEs go into receivership (a Mark Calabria favorite tactic). However, the GSEs are profitable and viable and so there is no way that that can happen.
The Democrats most likely seek to secure the GSEs existence through the attempt to have Watts confirmed by the Senate so that there is indirect influence and control of the conservatorship through Watts and Lew. It seems that they will most likely move towards restructuring or privatization vs nationalizing or eliminating them. The latter two are simply to unpalatable to shareholders and the people of the US.
The most likely scenario is something between these two extreme scenarios, both having severe political and economic repercussions:
* Restructuring and release from the conservatorship * Privatization and release from the conservatorship.
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