I went through last week why I don’t think Ed DeMarco will be fired. Now Neil BArofsky, who has a passing knowledge of the individuals involved, entered this debate. Geithner has used the moral hazard/strategic default argument plenty of times over the past few years. Now it could be that Treasury has magically turned the corner and gotten the message that the economy needs widespread debt relief. But the fact that this lines up perfectly with the upcoming Presidential election is enough to make one skeptical.

FHFA leader Ed DeMarco has indefinitely put on hold the question of whether he will allow Fannie Mae and Freddie Mac to offer principal reductions to delinquent underwater borrowers. He’s actually said nothing about it publicly since April. But Nick Timiraos leaks out the details of a new study that shows the benefits of principal reductions are greater than FHFA first surmised.

Good columnists like Edward Luce are explaining some of the basics of the ongoing housing/mortgage crisis, but they’re still assuming that the decisions open to Ed DeMarco will have a greater effect than is being discussed. That’s because his decisions about principal write downs would apply only to a small part of the overall depressed housing market.

State and federal regulators will submit a second term sheet to big banks in an attempt to settle the foreclosure fraud investigation, with some concessions to banks. But it’s still unclear where the penalties for violations of law and abuse of borrowers will wind up.

According to the Congressional Oversight Panel, over 29,000 Americans in “trial” HAMP modifications with servicers have been stuck in this limbo for over a year. The HAMP rules dictate that trial modifications last only 3 months. But for (at least) 29,000, those trial mods have lasted four times as long, with no end in sight.

After months of relative silence, House Democrats have finally begun to assert themselves on the issue of housing and foreclosures, which is directly harming millions of families and threatening economic recovery.

Everyone who has tried to make this voluntary system work must know that they are operating without a hammer, a legitimate incentive (not the relatively weak cash outlay HAMP offers) to the banks, in the form of a stick and not a carrot, to implement the modifications. Cramdown could have been that hammer, but a captured Congress decided against it. So all that’s left as leverage for someone facing foreclosure is the threat to walk away.

One thing is clear – if strategic defaults are so attractive, it’s a sign that the market is broken, not the people making self-interested decisions. Loan modifications have done absolutely zilch to help struggling borrowers. The options on the table that could have provided relief, like cramdown or own-to-rent, didn’t get adopted. And so you have a situation where the rich buy and drop homes with relative impunity, but the most vulnerable borrowers, the ones pushed into loans they couldn’t afford, suffer the consequences.