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November 24, 2014

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ELECTION 2012:

On housing, Nevada Senate candidates’ differing views boil down to federal government’s level of involvement

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Steve Marcus

Dean Heller and Shelley Berkley, candidates for Nevada’s U.S. Senate seat, debate on the “Ralston Reports” television program at the KSNV-Channel 3 studios Monday, Oct. 15, 2012.

Fannie Mae and Freddie Mac, the government-created mortgage giants that were taken over by taxpayers, own or guarantee a huge share of Nevada’s home loans — as much as 70 percent by some estimates.

So the decision by federal overseers of those companies to not allow for any principal reductions — lowering the value of the mortgages — was seen by some consumer groups, academics and elected officials as a hurdle to the housing market’s recovery.

The issue of principal reduction is at the heart of the philosophical divide over how active the federal government should be in trying to address Nevada’s problem. And it marks a key difference in how the two candidates running for U.S. Senate would approach the housing crisis.

In March 2011, Democratic Rep. Shelley Berkley and some 50 lawmakers signed a letter to the conservator of Fannie and Freddie, Edward DeMarco, urging him to start allowing principal reduction.

Allowing principal reductions would reduce foreclosures, they argued, ultimately benefiting homeowners and the general taxpayers, who bailed out the mortgage companies.

In debates, Berkley has repeatedly raised the issue of principal reduction.

Her Republican rival, Sen. Dean Heller, was serving in Congress at the time the letter was issued and did not sign it. He was appointed to the U.S. Senate seat in April 2011 and has taken a more cautious approach to the issue.

His Senate and campaign staffs would not address Heller’s position on whether principal reductions should be allowed by Fannie and Freddie directly. Instead, his spokesman, Stewart Bybee, said Heller is open to ideas as long as they are effective and judged by their economic impact.

On the severity of Nevada’s housing disaster, Heller and Berkley seem to agree.

But their approaches offer a contrast in styles to the problem of Nevada’s foreclosure crisis, which can be boiled down to one question: How active should the federal government be in trying to address Nevada’s problem?

Consumer advocates and broader housing experts characterize the Obama administration’s response to the housing crisis as slow and ineffective.

But Democrats are quick to cite Gov. Mitt Romney’s statements in Las Vegas that the housing market should be allowed to hit bottom — a laissez faire approach that Democrats portray as callous.

Romney has backed off from those remarks, and Heller has distanced himself from that approach, noting that millions of mortgages nationwide are severely underwater and face the possibility of foreclosure.

In debates and interviews, he has blamed the repeal of the Glass-Steigall Act in 1999, which deregulated banks, for causing the housing crisis.

His statements and legislation he has introduced indicates that he believes government does have some role in fixing the housing market.

But he also boasted to Fox News in March that he has voted against every government program designed to help homeowners.

“Government is having trouble getting us out, they have so many programs out there. I vote against all of them because they simply don’t work,” he said.

Heller has introduced three pieces of legislation related to the housing market in his 1 1/2 years in the Senate, each of them tailored to an aspect of the problem.

One bill, which has also been introduced by Berkley, would erase the tax burden on those who get approved for a short sale or principal reduction.

Another would force banks to respond to short sale offers within six months.

The third, and most ambitious, would allow borrowers in foreclosure to lease their homes from lenders for up to five years and then buy back the house.

Berkley, meanwhile, has promoted more aggressive federal programs and incentives. As co-chairwoman of the House Democratic Caucus Housing Stabilization Task Force, she has advocated for the Nevada Hardest Hit Funds, which provided $189 million to a state-run program. She has introduced legislation that would encourage private-sector investment through tax incentives to pay down mortgage debt.

And she has voted against Republican plans to defund housing programs twice, according to her campaign.

But she has also acknowledged what consumer groups and advocates for frustrated homeowners said: Many of the federal programs haven’t worked.

In March, 2011, she voted with Republicans to end the Home Affordable Modification Program (HAMP) program, expressing frustration at the ineffectiveness of the program, particularly for severely underwater Nevadans.

Since then, the administration has revamped the HAMP program into HAMP 2.0.

Berkley’s campaign, in a statement, said “promising steps” have been taken, “but more time and data are required to evaluate new program components.”

Her campaign said in a statement that banks and lenders need to be held accountable and work closer with homeowners.

Indeed, despite Democratic lawmakers’ letter and pressure from the Obama administration, Fannie and Freddie continue to not allow principal reductions.

DeMarco, acting director of the Federal Housing Finance Agency, said in July of this year that reducing principals would not be too risky for taxpayers.

Daren Blomquist, a vice president of RealtyTrac, said there’s no easy fix to the complex housing problem still facing Nevada. In September, the state led the nation in seriously underwater mortgages. More than 358,000 Nevada mortgages, 57 percent of all loans in the state, exceed the market value of the home by 25 percent or more.

He said principal reduction is a solution, if one with dangers.

“Getting these loans right-sized is as close to a silver bullet that’s in the arsenal,” he said.

Getting loans to match the actual values of homes is the ultimate end to the housing crisis.

But he acknowledged the danger in doing so. It could cost taxpayers, who ultimately own Fannie and Freddie, to bring down the value of the loans. And then there’s the “moral hazard” — if the government bails out underwater homeowners for bad investments, what’s to stop the excesses of the market similar to the bubble that led to the crash?

It’s a complicated question, Blomquist said, with no easy answers. But it’s one sure to face Nevada’s next senator over the next six years.

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  1. Principal reduction is blatantly INAPPROPRIATE. Inappropriate to neighbors, taxpayers, lenders, investors, savers, self reliant..... Just another give away to those who don't want to take their downs--and the rest of us must pay for. Life has ups and downs. Many of us prepare for that. Those who don't sometimes have to pay the piper. We all get hit with the downs but most of us sacrifice other things such as doing without and saving for unexpected circumstances.

  2. If they ever implement a principle reduction, then a lien must be placed on the home so that the home is encumbered until the reduction amount is repaid. I fully agree with Roslenda that principle reduction is unfair to all of those who realized that there is not a guarantee with life or of your home always increasing in value. Romney pretty much had it right, get the Government out of the way and let the market sort it out. That is why we are seeing a slow recovery, no one wants to take a chance. The banks will only loan money to those that have nearly perfect credit since the Government beats on them for loaning money to those with lower credit ratings (of which the Government encouraged through FreddieMac and FannieMae).

  3. I am in favor of reducing loans to market value but with one provision. That when the house was purchased the buyer had put 20% down and had a documented loan. In addition they did not take out a 2nd mortgage on the house.
    To many people working with corrupt mortgage lenders submitted liar loan applications and were approved with either 10% or less as a down payment. Then they quickly refinanced the houses or took 2nds on their homes. If my proposal was considered then
    The result would be that we could help legitimate buyers and not reward those who took advantage of the situation.
    Of all the homes under water I wonder out loud how many are people who are legitimately suffering and how many deserve to be thrown out of houses that they should not have been allowed to purchase.

  4. I've come across more then a couple of clients that if they could only refinance at today's interest rates, they could afford their mortgage payments without even needing a principal reduction.

    There are now also stories out there of homeowners who have been given principal reductions (even after doing a Cash out Refi and spending the cash who knows where) that can now sell their home for a profit.

    It seems as if the more career politicians get involved in the mess, the more complicated everything becomes when there are some pretty simple solutions.

    Donald Pettyjohn's comment above is spot on. Giving a principal reduction and taking that balance and putting a lien on the property that has to be eventually paid off to transfer title could have been done from day 1.

    That way... people who truly do want to keep their home and not just trying to game the system could be taken care of.

  5. As a few Commenters noted, there are folks who always play the system, abusing it. It is doubtful that they are the majority of folks dealing with the system, and any legislation should be proactive in identifying those who would be abusive and put in proactive measures to deter them.

    The great economic disaster was more about our country's and the world's financial institutions ABUSING public trust. Under the duress of potential collapse, the government BAILED their sorry asses out, so that we, and the rest of the world, could pick up the pieces peacefully (without riots and massive civil unrest, even lynchings) towards some form of recovery and having our lives intact.

    It is pretty unfortunate. Those who gamed and abused the good intentions of the system that the representatives of the People of the United States elected and trusted, should be dealt with as being the true criminals that they are. Millions of innocent people have been adversely affected by these people, and the innocents continue to suffer, while the criminals are bailed out and are free to continue their deceipts.

    At this juncture, I am all for reasonable principle reduction, with proactive measures in place.

    Blessings and Peace,
    Star