Analysis: Little-known bureaucrat is most powerful man in housing policy

By  Brad Plumer and Ezra Klein, Published: August 30 – Washington Post
The most powerful man in housing policy today isn’t President Obama. It’s not Treasury Secretary Timothy F. Geithner or House Financial Services Chairman Spencer Bachus (R-Ala.). It’s a little-known bureaucrat named Edward DeMarco.
DeMarco is the acting director of the Federal Housing Finance Agency. Which means that, under the terms of the 2008 Housing and Economic Recovery Act, DeMarco is in charge of supervising mortgage giants Fannie Mae and Freddie Mac. As such, any attempts the Obama administration might make to use Fannie and Freddie to stabilize the housing market run directly through DeMarco’s office. And in many of the attempts it has made, the Obama administration has not exactly found DeMarco to be a willing partner.

 

At the heart of the tension between DeMarco and the Obama administration is a conflict tucked deep into DeMarco’s job description: The head of the FHFA is stuck between the narrow needs of Fannie and Freddie and the broader needs of the housing market.

The agency’s official mission, on the one hand, is to “support housing finance and affordable housing, and support a stable and liquid mortgage market.” That could entail broader interventions in the housing market — say, reducing the principal on mortgage loans or helping underwater homeowners refinance, on the theory a stronger housing market and economy will be good for Fannie and Freddie.That’s how James Lockhart, DeMarco’s predecessor, saw it. “Fannie and Freddie are sitting on 30 million mortgages and own or guarantee 55 percent of mortgages in the country,” Lockhart says. “So any actions that they could take to help the mortgage market would help them long term.”But such policies might also expose Fannie and Freddie to more risk and increase their cost to taxpayers. And the FHFA’s other task is to get the mortgage giants back on a stable financial footing and spin them off from the government as quickly as possible. Since placing Fannie and Freddie in conservatorship in 2008, the Treasury Department has already spent $170 billion subsidizing the enterprises, of which $27.9 billion has been paid back.DeMarco, who declined an interview request, has tended to define his job quite narrowly. “As conservator, FHFA has a statutory responsibility to preserve and conserve the enterprises’ assets,” he told Congress this year. The insistence on shoring up Fannie’s and Freddie’s books may reflect his work experience. Before 2003, DeMarco was at Treasury’s Office of Financial Institutions Policy. As such, he had firsthand experience with Fannie and Freddie at a period in which they were running roughshod over regulators and expanding aggressively into the housing market.

That has DeMarco caught inside the central irony of the housing situation right now: A problem that was partially caused by loose lending standards and easy money is being worsened by tight lending standards and sparse financing. But correcting that irony is not DeMarco’s job, at least as he sees it.

All through the fall and winter, the Obama administration tried to pressure Fannie and Freddie to join a program that would allow banks and other creditors to write down mortgages. But in April, DeMarco finally put his foot down, telling Congress, “It has been our conclusion that it is not loss minimizing for Fannie and Freddie.” The administration has also attempted a number of programs to help distressed homeowners refinance or otherwise save their mortgages, but DeMarco’s insistence on tightening Fannie’s and Freddie’s lending standards and avoiding losses has undercut their effectiveness.

The Obama administration had hoped to be rid of DeMarco by now. In November 2010, it nominated North Carolina Banking Commissioner Joseph Smith Jr. to fill the position. But in Smith’s confirmation hearings, Sen. Richard C. Shelby (R-Ala.), the top Republican on the Senate banking committee, asked Smith whether he would resist pressure from the administration to write down mortgages at the expense of taxpayers. Unsatisfied with the answer, Shelby torpedoed Smith’s appointment, leaving DeMarco, the acting director, in charge.

Which isn’t to say that DeMarco tilts toward Republicans, either. “No one can accuse DeMarco of trying to stick it to the Obama administration,” says Rep. Barney Frank (Mass.), the leading Democrat on the House Financial Services Committee. “He has been equally resistant to Republicans who want restrictions on compensation or sell off the portfolio too quickly. He wants to maximize Fannie Mae and Freddie Mac’s returns, and he’s been very consistent in resisting anything that will jeopardize that.”

According to one housing expert with knowledge of the discussions, a few months ago, Geithner began looking for ways to fire DeMarco. But the plan would have required moving a credible replacement into the FHFA for at least 90 days beforehand. Geithner gave up the effort after being rebuffed by multiple candidates.

Nor, experts say, is it clear that the White House actually can fire DeMarco. By law, the White House has to have cause to remove the head of the FHFA, which is supposed to be an independent regulator. Simply disagreeing with the agency’s policy direction isn’t enough. Which means that DeMarco is likely to remain the most powerful man in housing for some time to come