DeMarco has argued on many occasions - including in a recent, threatening notice to local governments that are considering using eminent domain to perform principal reductions - that allowing this type of loan forgiveness would increase the risk of “moral hazard.” DeMarco’s argument is essentially that helping underwater homeowners might encourage others to default strategically in order to get help, too. DeMarco most recently rebuffed the White House’s call for principal reductions in late July.
The administration has data to support the strategy. Studies have found that widescale principal reductions would save money for the government and help create tens of thousands of jobs. More than one in five borrowers are underwater on their mortgages, owing more on their home than the home is worth.