Wednesday, Oct. 17, 2012 | 2 a.m.
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.