I'm not sure what Massachusetts Attorney General Martha Coakley thinks she's going to accomplish by simultaneously sweet-talking and threatening Mel Watt, but I doubt she's doing much more than engaging in political theater. Maybe she's setting herself up for a run for higher office and wants to make sure that the next time around, she doesn't get a butt-kicking like Scott Brown unleashed on her four years ago.
Massachusetts Attorney General Martha Coakley reiterated calls Wednesday for the Federal Housing Finance Agency to allow Fannie Mae and Freddie Mac to offer principal reductions to distressed borrowers and to participate in nonprofit home buyback programs.
Coakley sent a three-page letter to FHFA Director Mel Watt trying to persuade him that principal reductions could be crafted in such a way to prevent abuses, including what she called "the abstract fear of waves of strategic defaulters."
"Abstract fear"? You'd think that folks like Coakley, adherents to utopian progessivism that denies the reality of human nature and proposes that through the exercise of centralized state power, human beings can be perfected and justice achieved, here on Earth, would know all about "abstract fears," as well as "abstract joys," "abstract hope," and "abstract abstractions."
Nevertheless, in case the risk of strategic defaults might actually be grounded in reality, Coakley had an answer for Watt.
Coakley said one way to reduce strategic defaults would be to adopt clear modification underwriting standards, require a showing of hardship by the borrower and allow lenders to share in the home price appreciation.
Watts' predecessor, Ed DeMarco, adamantly opposed principal reductions. He felt that whole-sale principal write-downs would hurt mortgage bond investors which, in turn, would hurt Fannie Mae and Freddie Mac, which, in turn, would hurt the mortgage market. Coakley apparently thinks Mel is more sympathetic to a state chief law enforcement officer's sojourn into social policy, especially in the area of mortgage markets, where everyone knows a state attorney general is uniquely qualified to offer business-savvy solutions to thorny problems.
In case Mel is inclined to turn a DeMarco-like deaf ear to her entreaties to do the right thing, Martha whipped a big stick out from behind her back and threatened Mel with a beating if he didn't fall in line.
In the letter, Coakley even threatened to take legal action because the FHFA has refused to take part in buyback programs that allow nonprofits to purchase distressed homes at current market value and immediately resell them to the former homeowner.
"Our office also is considering all available legal avenues—including litigation—to ensure compliance with Massachusetts law, should FHFA fail to promptly amend its policies to allow the GSEs to participate in credible buyback programs," Coakley wrote.
Coakley is using as the basis of her threats the alleged violation by Aunt Fannie and Uncle Freddie of a 2012 Massachusetts law that forbids lenders from refusing to consider buyback offers at "fair market value" solely because the home will eventually be returned to the defaulting homeowner. I assume that DeMarco and Watt believe that a law that vague is likely to be held to be unenforceable against Fannie Mae and Freddie Mac, or perhaps they've just decided to become renegades and ignore the law because they take some perverse pleasure in lawlessness. I'm betting on the former, but I might be wrong.
At any rate, Watt hasn't publicly responded to Coakley (or if he has, the main stream press hasn't reported it). I wouldn't hold my breath waiting for the FHFA to cave on this one, although Watt is relatively new in the saddle, and you can't be sure which way he might ride. My guess is that Coakley will have to push her social engineering agenda in court. Pursuing it against a cash cow like the FHFA, which, with its charges in federal conservatorship, is not likely to be scared by the prospect to spending money on trial lawyers.