Sen. Elizabeth Warren asks Federal Housing Finance Agency Director Mel Watt about principal reduction for homeowners at a Senate Banking Committee hearing on November 19, 2014. (Screen grab via Senator Elizabeth Warren / YouTube)Elizabeth Warren tore into FHFA director Mel Watt over his failure to develop a program for Fannie and Freddie to provide principal modifications to underwater borrowers at risk of foreclosure. She also got in a dig for his failure to stop the agencies from pursuing deficiency judgments. That means going after former homeowners when the sale of the house they lost didn’t recoup enough to cover the mortgage balance. In the stone ages, when banks kept the mortgage loans they made, they never pursued deficiency judgements. They knew there was no point in trying to get blood from a turnip. Not surprisingly, the sadistic Fannie/Freddie policy has also proven to be spectacularly unproductive in financial terms. An FHFA inspector general study found that recoveries were less than 1/4 of 1% of the amount sought. Moreover, since those mortgage balances were often inflated by junk fees and other dubious costs, and mortgage servicers have done a poor job of maintain properties (they are too often stripped of copper and appliances, or get mold), any deficiency might be significantly or entirely the servicer’s fault.

Like most Warren performances, this one is worth watching, particularly when Mel Watt offers utterly unconvincing responses and Warren will have none of them. Here is a key part of the exchange:

Warren: The Treasury Department has found that principal reductions could save Fannie and Freddie nearly $4 billion and help half a million homeowners stay in their home. It has been six years since Congress created FHFA and in all that time your agency has never, not once permitted a family to reduce its principal mortgage through Fannie or Freddie. I’ve asked about this repeatedly and you’ve said you’d look into allowing Fannie and Freddie to engage in principal reduction; you said it again today,. You’ve been in office for nearly a year now and you haven’t helped a single family, not even one, by agreeing to a principal reduction. So I want to know why this hasn’t been a priority for you. The data are there. Watt: It’s probably an overstatement to say it’s not been a priority,” Watt stammered. “It’s just a very difficult issue. The reason it is difficult is because we are looking for exactly what you said – a win-win situation. We have to do this in a way that is responsible, otherwise we just reduce principal for everybody across the board…is not what anybody I think is advocating for, so then we have to decide what is a responsible way to do that…

Warren interrupted, and for good reason. “Responsible” is a dog-whistle word in mortgage policy debates. The phrase “responsible borrower” is the virtuous counterpoint of “deadbeat borrowers.” If you listened to Obama’s statements about assisting struggling homeowners, you’d regularly hear him talking about “responsible borrowers”. In practice, this turns out to be a Catch 22: if you are in trouble through no fault of your own, say because a major employer failed and tanked the local economy, which hurt your income and the market value of your home, you are nevertheless irresponsible, as clearly proven by the fact that you are in financial duress. When bank are hit by what they depicted as black swan events but they actually helped create, they get bailed out. But regular people who played no role in setting in motion the tractor trailer that ran over them? Fuggedaboutit. The “responsible way” is code for the Administration’s extreme reluctance about having the appearance of giving individuals a break in a country that is awash in welfare for the rich.

But what is telling here is that the reason that Ed DeMarco, the former head of the FHFA, was pilloried for years by Democrats before he was finally replaced was for the very issue that has put Mel Watt in Warren’s crosshairs: not offering principal modifications to borrowers. The very fact that Warren can cite CBO and Treasury studies on probable impact says there are already models out there for how to pick and choose among financially stressed homeowners; she referred to even more private studies. There’s no excuse for the FHFA not to have at least a pilot program underway, save it has no real intention of doing much.

This outcome should hardly be a surprise for the Obama Administration. We were against the Watt nomination and pointed out, as representative from Bank of America Charlotte, he was a notably bank-friendly Democrat, and had opposed Audit the Fed, been missing in action during the London Whale hearings, and hosted soirees well populated by bank lobbyists. DeMarco was a convenient scapegoat. As we wrote in 2012:

But all of this noise about GSE principal mods is really a smokescreen. DeMarco has become the Administration’s favorite scapegoat as a way to divert attention from its refusal to get tough the banks in order to fix the housing market. Among the obstacles to a real estate recovery: a broken servicing model, in which servicers find it more profitable to foreclose than modify loans; second liens on bank books at inflated values; rampant chain of title issues; a huge overhang of foreclosures in progress. If the Administration wanted serious principal reductions, they could have used the hundreds of billions of dollars available to them under TARP to do so. That was under its power and required no Congressional action. Instead of owning up to disasters like HAMP and FHA-Short Refi, they whine about DeMarco, Republicans in Congress, reckless homeowners, and once in a while, for show, they’ll say a few bad words about the banks that they continue to coddle. Just look at the conflicting messages: the banks are in such bad shape that they can’t be asked to write off second liens in full in the Administration’s mortgage settlement, yet they are deemed to be healthy by the Fed and are allowed to pay dividends rather than rebuild their balance sheets.

Dave Dayen similarly saw the demonization of DeMarco and the touting of Mel Watt as some sort of savior as a headfake:

Watt, a longtime friend of the financial industry, might make a terrible FHFA director, and he might make a fine one….The real story here is how the Obama administration has used the FHFA director position as a convenient distraction from their disastrous housing policies…. Too many liberals, in no small part egged on by the White House, have built up this single FHFA position as the sole impediment to justice and relief for millions of troubled homeowners. For years, Ed DeMarco has been a cartoon villain in this rendering, a former Bush appointee fiendishly destroying the American dream all by himself. (I’m hardly being hyperbolic; one site terms him the biggest roadblock to our economic recovery.)… So why the liberal crusade against DeMarco?….By offloading the entire responsibility for the nation’s housing woes to one regulator, the White House has used DeMarco as a foil, averting their own shameful responsibility in designing the failed HAMP program and letting banks off with sweetheart settlement deals for systematic crimes committed against homeowners. DeMarco turns out to be very useful to the White House, absorbing all the scorn of liberal housing groups while the Administration floats along without blame. The Administration has slow-walked replacing DeMarco in a manner that can only suggest they’re not all that perturbed with having him remain in place.

In fact, the trigger for the Administration to rouse itself and finally push DeMarco out the door may well have been his filing of 17 putback lawsuits against mortgage servicers seeking a total of $200 billion in damages. And the Administration looks to have managed to have its cake and eat it. The recent spate of bank settlements were largely mortgage securitization settlements with a series of misbehaviors all bundled into one big deal to make the headline numbers seem better. And the biggest item in these deals, far and away, were the DeMarco putback suits, which suddenly became Administration accomplishments. For instance, of the $9 billion in cash (the number to watch) in the recent JP Morgan mortgage settlement, $4 billion came from the FHFA component.

Let’s look at the long list of prominent Vichy Left types that sung from the “Fire DeMarco” hymnal and either implicitly or explicitly backed Mel Watt:

As much as Warren also supported the Mel Watt nomination, she deserves credit for calling him out when he’s proven, as we anticipated, to be as loath to provide tangible relief to homeowners as his much-pilloried predecessor.

But will we see anyone on the list above to start demanding that the Administration fire Watt if, say in another six months, Watt is again on the hot seat before Warren with another round of “this is really hard” lame responses? The answer is no, because these soi-disant progressives can’t say in public that the Administration is the real reason borrowers continue to be used to foam the runway for banks.