Elizabeth Warren Directs Mortgage Ire at Banks: Why Not Agencies?

Includes: FMCC, FNMA
by: Bruce Krasting

Elizabeth Warren has been all over the media of late. This lady is a ‘hot property’. And with good reason. She has all of the credentials. Harvard Professor, eight books, the Chairperson of the Congressional Oversight Panel, she’s on the list of the top fifty “Most influential lawyers in America” her name even has come up as a candidate for the Supreme Court.

Not only does she have the credentials, she has a look. There is something about her that when she talks to the camera you get a warm feeling and think, “Finally there is someone who is making some sense of this mess!”

I think she is blowing smoke.

Today there was another Congressional hearing on the status of mortgage defaults in this country. We have a significant portion (20+%) of homeowners that are now underwater on their mortgage. The big banks went to the Hill and swore they were doing just about everything to unscramble the eggs. Our boys from JP Morgan (NYSE:JPM) said that it would cost “hundreds of billions” to write down the principal of the mortgages that are underwater. 'Heaven forbid that that would happen', was the warning. I was left wondering what the real value of their book was given their defense that they could not afford to realize the embedded losses.

The simple fact is that of the 1.1 mm who have requested mortgage relief only 170k have gotten it so far and almost all of those have been temporary reductions in monthly payments but no reduction in principal. It is nearly two years since this blew up. We have made almost no progress in addressing it. We are kicking a can down the road and hoping that ZIRP finally causes some housing inflation to balance the books. That is not working at all. It is just causing bubbles outside of residential real estate.

Ms. Warren had strong words regarding the bank's stubborn position today. From her interview on ABC World News:

It really is stunning that this is the position that we are in. The American taxpayers have shoveled out 100’s of billions to rescue these financial institutions and now those same institutions don’t want to be part of the solution.

So she gets more respect and more visibility for bashing the banks. But my question for Ms. Warren is, “What are you doing in your own back yard?”

Warren should look at the numbers and start stirring this pot to where she might actually get something done. Right in the House. She can call up Barney Frank and get the numbers. She could have lunch with Shaun Donovan over at HUD. He has all the info for the FHA. Even better she could take the time to drop over to see Mike DeMarco at the FHFA. He has tons of numbers too. The all have the same number for what they have contributed to principal debt relief. The answer is close to zero.

The ultimate cost of the Washington mortgage lenders will exceed $500 billion. As of today it is a blank check. It will be many multiples of the net costs of the TARP. So when Elizabeth talks of “shoveling tax-payer money” there is no greater shovel full in history than what exists right now in D.C. The idea that “Those same institutions don’t want to be part of the solution” should not extend to the 70% of the mortgage market that Washington now owns is flawed logic. And she is well aware of that fact.

I’m not sure what ‘office’ Ms. Warren is pursuing. She could set a very high bar if she stood up to the plate and directed her rancor and visibility toward the Agencies. She could influence the outcome of this. She can either lead, or she can bad talk the private sector. If she does step up she will have the support for any office she wants. If she doesn’t, she may go back to Boston and teach law.