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Regulator leads on thorny issue of housing finance
March 7, 2013 / 12:26 AM / 5 years ago

Regulator leads on thorny issue of housing finance

WASHINGTON (Reuters) - Edward DeMarco never thought he would stay so long as the regulator of mortgage finance companies Fannie Mae FNMA.OB and Freddie Mac FMCC.OB, but nearly four years into the job he is emerging as a leading architect of the U.S. housing finance system.

U.S. Federal Housing Finance Agency Acting Director Edward DeMarco (R) talks with fellow attendees as they wait for the start of a meeting of the Financial Stability Oversight Council at the Treasury Department in Washington March 17, 2011. REUTERS/Jonathan Ernst

Tapped in August 2009 to act as a caretaker for the two state wards, the acting director of the Federal Housing Finance Agency has stepped into a vacuum created by Washington gridlock to lay groundwork for a post-Fannie, Freddie future.

Some believe the career civil servant’s de facto authority is unhealthy given the decisions that need to be made to determine the government’s future role in housing.

“A lot of power is being wielded by an independent, unaccountable agency,” said Julia Gordon, director of housing finance and policy at the Center for American Progress, a liberal think tank.

“Is this how we should make important decisions that will impact most Americans for a long time to come?”

DeMarco has raised hackles on the left for refusing to permit Fannie Mae and Freddie Mac to write down loan principal for troubled borrowers, a decision he argues he took to protect taxpayers. President Barack Obama tried once to replace him, but Republicans blocked his nominee.

To DeMarco and his supporters, there has been little choice but to shrink the two mortgage companies, which have come to finance about two-thirds of new U.S. home loans, and lay ground work for whatever might come next.

Fannie Mae and Freddie Mac were seized by the government and placed into a conservatorship in September 2008 as mortgage losses threatened their solvency. It was supposed to be a short-term solution to prevent a deepening of the financial crisis and provide time for Congress and the White House to decide their fate.

Years later, Republicans and Democrats on Capitol Hill have yet to resolve disagreements over the government’s proper role in housing, although there is a consensus the government-sponsored enterprises, or GSEs, should eventually be wound down. Their bailout has cost taxpayers $131 billion, but it has allowed them to remain a prime source of support for housing and the staple of American home ownership, the 30-year mortgage.

“DeMarco is filling a void that arises from a lack of congressional action,” said Bert Ely, chief executive of bank consulting firm Ely & Co. “It is generally conceded that fundamental GSE reform initiatives won’t happen this year.”

Indeed, a legislative fix could be years off because of the political risk lawmakers would face in pulling back government support for home ownership.

NEW SECURITIZATION PLAN

DeMarco, 52, was a deputy at FHFA when its leader, James Lockhart, an appointee under President George W. Bush, left for the private sector. He has served since in an acting capacity, never having been confirmed by the Senate for the job.

He is known for a no-nonsense style and a methodical, data-driven approach to decision making that associates say is free of ideology.

An avid Washington Nationals baseball fan, DeMarco can see the team’s ballpark from the desk where he sits each day, and he keeps a team clock on his wall.

He has woven his way through several government agencies.

During a 10-year stint at the Treasury Department, he oversaw analyses of public policy issues involving Fannie Mae and Freddie Mac. He told a panel investigating the 2007-2009 financial crisis that while at Treasury, he warned of the risk that the two firms could fail. He first began studying the GSEs at the General Accounting Office in 1986.

As their conservator, DeMarco has the authority to determine what business the companies pursue and he directs how they are run. He has taken several measures to try to reduce their dominance.

This week, he announced steps to create a new company, funded by Fannie Mae and Freddie Mac, that will take over much of their back-office operations and provide a new platform for securitizing mortgages, a line of business that has been central to the mission of the two GSEs.

The new company could eventually be privatized or formally folded into the government, a decision DeMarco made clear would be up to Congress.

“He’s a cautious bureaucrat,” said Jim Millstein, chairman and chief executive officer of Millstein & Co., who helped the Treasury Department oversee bailouts of AIG and Citigroup. “At every opportunity, he has taken pains to say he is waiting for direction from Congress or the administration.”

POLITICAL LIGHTNING ROD

Fannie Mae and Freddie Mac do not make loans. Instead, they provide financing to banks and lenders by purchasing mortgages, which they either keep on their books or package as securities which they then sell to investors with a guarantee. The system is intended to boost lending and homeownership.

DeMarco’s latest proposal, unveiled on Monday, will form a joint venture that could end up replacing the two firms.

Clifford Rossi, a former banker and Freddie Mac official who now teaches at the University of Maryland said the merger of Fannie and Freddie’s functions is a “signal to the market that the status quo since 2008 for the GSEs is changing.”

FHFA should continue to lay “the groundwork for the next phase of housing finance and the re-emergence of private capital into the market,” he said.

The plan is designed to pave the way for a housing finance system that could function no matter what lawmakers eventually do with Fannie Mae or Freddie Mac. The Treasury Department did not respond to a request to comment on the plan.

“This is an eye towards the long-term,” DeMarco told reporters on Monday. “What we are trying to do...is ease the transition from where we are today to wherever lawmakers decide the country ultimately ought to go.”

Any eventual reform is expected to retain some role for the government in supporting lending. Without a backstop, loan availability might dry up and mortgage rates, now at historic lows, could jump and leave the housing market vulnerable.

Republican Representative Scott Garrett, who has his own proposals for reforming the mortgage finance market, said DeMarco’s plan for a new platform to bundle mortgages into securities for investors and his efforts to shrink the GSEs are on target.

“This is part of his responsibility in conservatorship,” Garrett said. “Eventually this will be beneficial to the taxpayers.”

But his efforts have made DeMarco a political lightning rod, particularly for criticisms from the left.

In perhaps the most visible political showdown, DeMarco fought off pressure from the White House and congressional Democrats to allow Fannie Mae and Freddie Mac to write down loan principal for troubled borrowers, an action he claimed would increase the cost of their taxpayer bailout.

“My question is why DeMarco is giving speeches with major policy proposals when he has not been confirmed,” Representative Elijah Cummings, a Maryland Democrat who is one of DeMarco’s toughest critics, said in response to DeMarco’s announcement of the new joint venture on Monday.

“He has already shown that he is unwilling to follow congressional direction with respect to housing issues.”

But others view DeMarco’s regulatory policies as balanced and within his mandate.

“His task is to conserve the assets of Fannie and Freddie,” said Josh Rosner, managing director at research firm Graham Fisher & Co. “I‘m not buying that he’s the most powerful man in housing, nor that he’s taking actions that assert policy prescriptions as much as they’re in line with his view of the conservatorship.”

Reporting by Margaret Chadbourn; Editing by Tim Ahmann and Leslie Gevirtz

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