California’s attorney general seems to believe we can just legislate unpleasant economic realities such as mortgage foreclosures.
She wants Fannie Mae and Freddie Mac to stop foreclosing in California.
Fannie and Freddie have required a $160 billion in taxpayer funds to stay afloat and will need another $100 billion over the next three years. If Fannie and Freddie stop foreclosing in CA, their costs will rapidly escalate and taxpayers will have to step in.
Mr. DeMarco has resisted principal reduction, saying it would cost taxpayers too much.
Proponents of debt forgiveness note that roughly one out of five Americans owes more on a home than it is worth, and that negative equity totals almost $700 billion. Reducing some of that debt will save families’ homes and save lenders money, they say, by reducing the number of foreclosures. In California, banks agreed to give $12 billion in debt reduction under the settlement, and the architects of the settlement hope that will pry open the spigot of debt reduction, which banks have been reluctant to do on a large scale.
“I know this effort will confirm what many economists have already concluded: principal reduction plans are the most helpful form of loss mitigation for homeowners and the most cost-effective for investors when compared to foreclosures,” Ms. Harris wrote.
For his part, Mr. DeMarco has said that while debt forgiveness would save taxpayers money in the long run by preventing foreclosures, it would not save as much as another type of loan modification called forbearance. With forbearance, a portion of the debt is suspended until the end of the mortgage term or until the house is sold. The homeowner’s payments are reduced but he does not regain an ownership stake in the home.