WRONG
TURN
they were before the financial crisis. Despite a new law that gives
regulators the power to seize and
unwind a “systemically important” bank, critics on both the left
and right think TARP set a terrible
precedent — that the government
will feel pressured to save the
banks again should it come to that.
“Moral hazard is a very real
issue for principal reduction,”
said Christy Romero, the special
inspector general of the bailout
fund. “But taxpayers funding any
of these programs is a moral hazard. It will be one of TARP’s longlasting legacies.”
‘WHIPPING BOY’
Last year, as part of the negotiations that would lead to the national mortgage settlement, the
issue of principal reduction came
up again. State and federal negotiators talking to the banks about
penalties wanted some part of
the deal to include mandatory
loan forgiveness.
It’s not clear why the administration, previously ambivalent about
principal reduction, now supported
the idea. At the time the deal was
coming together — the fall and
winter of 2011 and into early 2012
— the Occupy Wall Street move-
HUFFINGTON
11.04.12
ment was at its peak influence. The
protests, while relatively small,
reflected broad discontent among
Obama’s liberal base with his policies, which seemed to favor Wall
Street at the expense of homeowners. (Bankers, of course, would take
the exact opposite view).
Whatever the reason for the
change in attitude, the administration had a problem: while
banks were willing to go along
with a mandatory principal program as part of a settlement,
they actually own only about 10
percent of the loans they service. Most of the rest are held by
Fannie Mae and Freddie Mac, or
by private investors who bought
mortgage bonds during the run-up
to the housing collapse.
Whether banks can write
down principal on loans held by
private investors is something of
a grey area — various banks interpret their servicing contracts
in different ways. But there was
no ambiguity about Fannie Mae
and Freddie Mac loans. The two
companies, which still owe taxpayers $140 billion from the
2008 bailout that kept them
from collapsing, forbid principal
write-downs on the loans they
control, on the orders of Edward