(Bloomberg) -- Nine state attorneys general have just asked President Obama to fire Edward DeMarco, acting head of the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac. They say: "FHFA's refusal to adjust its policies to allow for principal forgiveness and forbearance stands as a major impediment to addressing the foreclosure crisis."
This isn't a new accusation. Commentators such as Felix Salmon and Paul Krugman have been calling for DeMarco's removal for quite a while. Gretchen Morgenson has defended him: He's just doing his job, she says.
DeMarco's position on principal reduction is mistaken, but he shouldn't be made a scapegoat for all that's gone wrong with the administration's policies on housing. Blame that larger failure on Treasury Secretary Tim Geithner and the president himself.
DeMarco's critics are right that principal reductions for underwater borrowers -- those who owe more than the value of their house -- would help even now to revive the housing market by reducing defaults and relieving the downward pressure on house prices from foreclosures. They would have helped even more before 2009, when the downturn was at its most severe, as John Geanakoplos and Susan Koniak explained.
Avoiding foreclosures is crucial. Nothing suppresses home values like squatters and drug dealers moving in next door as homes are abandoned. Foreclosures also increase the supply of houses for sale. Atif Mian, Amir Sufi, and Franceso Trebbi found they were responsible for 20 percent to 30 percent of the decline in house prices from 2007 and 2009. Foreclosures drive down prices, which puts more borrowers underwater, which increases foreclosures, which drives down prices, and so on.
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