DeMarco is a gatekeeper, in place to prevent the securitzed paper behind the mortgages from blowing up the markets. This is why the banks are happy to sit on shadow inventories of foreclosed homes. The banks recognize that the property values will take decades to recover. I know in a friend's neighborhood homes that were selling for $510k in 2007 are now going for $136k, and it has been a steady march downward in property values since the crash. As counter-intuitive as it seems, the foreclosed homes have more value to the banks unsold and empty than resold, for a foreclosed home is still worth its original mortgage value, and that means the securitized paper, which is worth more than the property, remains undisturbed. The income the bank is making off of a securitized mortgage of a foreclosed, empty home is more than the loss of income from the mortgage not being paid, for the house may have originally been sold with no money down, but the mortgage was invested at the full face value of the mortgage as if it were paid off thirty years in the future already.
So principal write downs adversely affect the underlying mortgage securities, that are sliced and diced throughout world markets, and could cause portfolios to crater globally with no warning to the investors should the mortgage securities be tampered with. I'm certain this is the reasoning DeMarco is using in preventing principal write downs. Quite a Gordian Knot we have.
Read the Article at HuffingtonPost
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