Journalism in the Public Interest

Are White House Housing Plans Really Stymied by the Regulator For Freddie and Fannie?

The head of the FHFA has steadfastly opposed principal reductions, which the Obama administration supports. Can the White House replace him?


Federal Housing Finance Agency Acting Director Edward DeMarco listens to Fannie Mae CEO Michael Williams testify before the House Financial Services Committee's Oversight and Investigations subcommittee on Dec. 1, 2011, in Washington. (Chip Somodevilla/Getty Images)

For months now, the White House and the head of the regulator overseeing Fannie Mae and Freddie Mac have clashed over principal reductions for struggling homeowners. The Obama administration says that reducing the amount borrowers owe is essential to the housing recovery. Edward DeMarco, acting director of the Federal Housing Finance Agency, maintains that principal reductions would cost too much for the taxpayer-owned companies.

Frustrated by DeMarco's stance, Democrats in Congress and some state attorneys general have called for his resignation. Rep. Elijah Cummings, D-Md., said recently of DeMarco that "he and he alone stands in the way of hundreds of thousands of people, if not millions, being able to [literally] get a new lease on life."

Democrats have argued that the administration can't get around DeMarco and the FHFA's opposition to principal reduction. Is that really the case?

It wouldn't be easy, but the White House does have options.

The most straightforward thing the White House could do is nominate a replacement for DeMarco, who became acting director of the agency in 2009 after his predecessor stepped down. The administration had picked a successor more than a year ago, but Republican objections led to the nominee's withdrawal. The White House hasn't named a potential replacement since. It also passed on the chance for a recess appointment over the winter.

Obama has never called for DeMarco's resignation, though the administration has consistently urged DeMarco to adopt principal reduction. The Secretary of Housing and Urban Development, Shaun Donovan, said in February, "Our goal is to get a good nominee and get someone in there who shares our view."

The White House can't simply fire DeMarco. Independent regulators are supposed to be immune from political pressure, and it is rare that the president would seek to remove them. In some cases, heads of independent agencies have stepped down amid controversy. Former SEC Chairman Harvey Pitt did so in 2002. But even that is rare.

There's no precedent for it at the FHFA, which was created in 2008 just before the government bailed out Fannie and Freddie. DeMarco said this week that he has experienced "a substantial attempt to influence or direct an independent regulator."

By law, the president nominates the FHFA director for a five-year term, and can remove him only "with cause." But unlike those of some independent agencies, the statutes governing the FHFA don't define "cause." The agency declined our request for comment, while the White House didn't respond.

Even if the president got DeMarco to step down, the administration would only wind up with one of DeMarco's deputies as another acting director, which wouldn't guarantee a shift in policy.

The Obama administration may believe that it can't get a new nominee through Congress. After all, the previous nominee, Joseph Smith, was opposed by some Republican senators precisely because they felt he would be too close to the administration on principal reductions. In the meantime, DeMarco is taking the heat on principal reductions while other shortcomings in Obama's housing policy fall out of focus.

Despite some of the heated rhetoric and criticism, DeMarco doesn't face easy choices. His mandate to protect Fannie and Freddie's bottom line — and thus taxpayer money — can conflict with his agency's duty to promote the stability of the broader housing market.

While DeMarco has opposed principal reductions on the basis that they would be too costly, ProPublica and NPR recently reported that FHFA internal estimates revised their earlier position, and that in light of new government incentives, principal reductions may now actually save the companies money. This week, DeMarco told The Financial Times that principal write-downs would amount to a giveaway to banks — seemingly a new argument for him.

Given that the Administration has so far bowed to banks rather than borrowers, this looks like a bit of kabuki: the WH pretends to act on behalf of homeowners (read voters) and the bad regulator says no, thus frustrating the “good” Obama. If the Administration was serious about change it would put forward another nominee. It would also have created policies that actually helped rather than hurt homeowners. Instead, it would rather pretend to be doing something. There are plenty of policy choices that have been stymied by Rs but housing is not one of them.

Somehow, this reduction in principle owed in an attempt to “level out the housing market” is major unfair for those citizens who bought with scruples, and full intent of making the mortgage, the neighborhood, the ups & downs, WORK for them.  They have stick-to-it-of-ness.  Why shouldn’t EVERYONE get a REDUCTION on their principle owed?  After all, who held a gun to the heads of those who decided to buy HIGH?  It was their own, uneducated and/or greedy selves that allowed themselves to get into this soup of despair.  Yes.  They are better off walking away in most cases.  The Bank will then take ownership, and a hardworking American Family can THEN afford the very same house, as the price would have dropped substantially…closer to what the actual real estate market can bear.  Why not REWARD$ those who have been diligent and sacrificed, in many cases, to MAKE EACH payment on their mortgage, by giving THESE CITIZENS a financial break?  Being in the Real EState Market, I often see that the “Short Sales” being bailed out by the Banks, which is backed by Taxpayers’ Monies, own multiple properties!!!  And they go to an Attorney who “shelters” all the other properties, then they walk away…up to 50% of their original commitment.  I say, STOP REWARDING the GREEDY!  It’s time we gave the very same breaks to the HONEST CITIZENS!

DeMarco is a curious one.  He’s hellbent on pretending he can sustain Fan/Freddie as profitable entities.  Why?  My guess is his job “performance” is measured on that—that he’s spent his career checking boxes on what he’s supposed to do, and been promoted again and again for hitting those marks.  Not a bad thing in an employee.
Two things screw that up here:
1.  the agencies are not and will not be profitable for a long time.  They’re playing “bad bank”, and we should all rejoice that they are.
2.  Prin reductions may be least-bad or array of bad options the US economy has to break logjam in housing, put it behind us, and move fwd toward better days.  But that “option” by definition means massive additional losses at the Agencies.  full stop.  Republicans need to include this part in their high-minded calls for prin reductions…  acknowledge how this cool idea will bury fannie/freddie as going concerns.  It’s worth it i think, but americans need to just say it.
(also, anybody assigning some moral imprudence to all homeowners stuck in neg equity doesnt get it— the only thing separating the righteous borrower from the creep is often simple good luck to have purchased home in 2002 when the “greedy” guy bought in 2007.  gotta toss the self-congratulating over moral uprightness or we’ll never dig outta this mess)

I am tired of the press carrying water for BHO regarding the ‘dilemma’ of GOP so-called obstruction to a replacement for DeMarco.
The Obama admin waited 22 months - count ‘em - to nominate someone to replace him. That’s 22 months from inauguration - much longer of you count the time BHO was planning his WH staff in the fall of 2008.
Obama could have named someone for approval when Dems had control of Congress. How hard would that have been?
Instead, clueless about the problem and obsessed with the unsellable healthcare plan, Obama ignored housing issues. Time passed, the GOP came back into power on the Hill, and we are stuck with DeMarco.
Weak leadership, whining and a flawed timeline. All to the detriment of millions of homeowners who sorely needed guidance as they absorbed the consequences of unchecked bank abuses.
You can keep that change.

David P. Summers

March 28, 2012, 8 p.m.

What about those who didn’t buy risking mortgages.  Maybe we should give them an assurance that they can engage in risky borrowing and, if things to bad, they get a principal reduction?  Just because that will help inflate the next bubble is no reason why shouldn’t all get what money we can from the government?

Is it me, or is it typical that someone tries to put political pressure on someone, finds they are stymied by laws meant to shield them from political pressure, and they never seem to ask “should I be doing this”?

DeMarco gets support on the write-downs-as-backdoor-bailout and on the question of to what degree Freddie and Fannie can actually stabilize the market Gretchen Mortensen at the NYT here:

Morgensen has been in the borrowers’ corner for some time now, so she’s not to be mistaken as a flack for the Street.

Probably the easiest way to evaluate the wisdom of writing down more loans—his agencies have already written down a higher percentage of struggling loans than the banksters have—is to find out whether or not the big banks like it. If they do, then he’s doing the right thing.

Principal reduction is difficult and often prevented through legal contracts that the administration cannot pierce. That said, the banks have benefitted from being able to borrow at 1/8th of one percent and can certainly up the refinance opportunities to level the market. That will not immediately fix an underwater mortgage but massive refinancing at 3.75% would likely substantially lower payments for all. The hurdle is that banks that once accepted “piggy-back” mortgages, two simultaneous mortgages such as 80/21 or 75/25 are no longer accepting these high loan to value loans.  This is a crock! HAMP is also a bad joke because many “investors” who hold the mortgage serviced by first and second loans do not have to participate in a modification. A pay-off through a refinance would eliminate that hurdle. To further complicate people trapped in high rate second loans may have their first loan eligible for HAMP and a second with a investor that will not participate. The solution is a longer term refinance of the whole combined mortgages. Even if given a 40 year or 50 year mortgage the homeowner would benefit from a historic low rate and most homes are sold within a 12 year period anyway so a massive refinance would stabilize prices and when they inevitably recover they may get a better price and in the meantime at least borrowers are continously raped by predatory high rate loans. Why isn’t the government forcing all banks to offer a refi at today’s low rates for everyone?

@ Mike - even ‘lil Timmy G. has dropped the line “but there are contracts.” The bailout was a contract, signed by 13 bankers (read the book by that name. It over-rode previous bank lending and law of all kinds. Loan mods for homeowners was in the original bailout language, which the bankers agreed to (well, they knew there were no teeth but agreed in principle.)
Contracts? Like the ones Chrysler bondholders had? I am refraining from laughter here.
Please. That’s so 2009.
BTW - Fannie has been offering people, including me, 2% interest rates on boom-era nuts. I said no thanks. The house is cut in half pricewise. Adjust principal, or take it back banksters.
The ‘extend and pretend’ dead-end serves no-one, except banks who preserve the loan on their books as performing. It’s a backdoor bank bailout.

I’m not sure if you are just trying to be funny or if you are completely ignorant about contract law and specifically the role that a servicer (toll collector) plays verses the investor that owns the loans.
In some cases, 30-40% of the time at the big servicer, the bank owns and services the payments. That means 70% of the time they do not. The government is powerless to force an investor, like Royal Bank of Scotland, for example, to accept any modification. That is why HAMP is and always will be a failure. A principal reduction or modification scenario sounds like help but is not. A refinance, on the other hand, gives the investor all of their money back. The investor may not be happy about it because they would have preferred to receive higher interest or the title through foreclosure, but they have no choice. The congress seems to think it is OK to offer banks an artificially low FED funds rate as a more preferred bailout mechanism to just repaying an otherwise recalcitrant investor and forcing a new “extend-and-pretend” mortgage as you call it. The only way to sop up the available inventory of homes is to loosen the credit refinance opportunities to prevent further defaults through lower payments. Why should a bank be allowed to borrow from the FED on such generous terms (a fraction of 1%) and not have to “pay-it-forward” by refinancing loans (forget underwater for a minute and just think about all the high LTV loans that could be helped). I think it’s very telling that you criticize my suggestion but have no alternative solution. Try a little B.S. and Bring Solutions!

Homeowner preservation was an enumerated aspect (heavily promoted by pols at the time) of TARP.
It should have been done as agreed. Banks quickly skipped this when they realized there were no teeth. That was exploiting a loophole, and had nothing to do with contracts and the rest of the blather banksters now push:

I agree Starry homeowner preservation should have been promoted. Mortgage brokers, banks and Wall Street were greedy. It is sad however that the truth of the matter was US Treasury was ignorant of the structure of the the loan sourcing, sale, electronic registration, securitization, servicing, loss mitigation, and foreclosure process for mortgages. They assumed incorrectly that a servicer was the key decision-maker and ignored how they like any other bill collector, make money. They also assumed incorrectly that a loan modification was the easiest solution.  Saying contracts had nothing to do with it make you sound ignorant that we are in fact a country built on laws. Laws even the Treasury cannot break or ignore. The money spent setting up the disaterous “Making Home Affordable” should have been spent encouraging a massive refinancing effort to help borrowers lower payments. The reason they didn’t do that is: 1. not enough liquidity in the system to refinance everyone at once; 2. they didn’t want to appear to “reward” the institutions that made these high risk loans by paying back 100 cents on the dollar; 3. The home is worth half of what the loan is for and they do not want to realize the loss until they absolutely have to with a foreclosure.  Who ultimately suffered, the borrower who is either stuck in a high rate, high LTV loan with no refinance options available, or worse they may lose their home because they cannot afford the higher “reset rates” on their adjustable rate mortgages and they stand to lose everything.

Mike:  contracts get broken/restructured/amended all the time. So i dont follow the impenetrable barrier thinking.  Your “re-fi” suggestion seems less a re-fi than a govt forced breaking of a contract.  Real re-fi means new loan; which means new underwriting.  But underwriters stop reading app’s when they see home value at 50% of loan amt requested.  So there’s really no re-fi.  It’d be more a govt forced break of contract. 
As long as we’re talking breaking apart contracts why not focus on prin reduction; since it’d have bigger impact for solving housing crisis. 
(Note that lots of troubled borrowers need to move to cheaper home to start rebuilding their finances… but cant sell at a price high enough to pay off loan and clear lien. Prin reduction offers a glimmer of hope to do that…but lower rate re-set does not

Principal reduction is a grant, a gift and unfair in most cases. Hundreds of thousands of homes are underwater. This is why Principal Reduction almost never happens at the banks or the GSE’s regardless of what the TARP MHA program states. It is usually only done as part of charity efforts to elderly or infirm. I’m not supporting that, I’m merely reporting it because it seems many on this site are clueless to the limits of what can actually be done through the MHA distasterous program.
The home crisis is not just about underwater it’s about being able to have a fair affordable borrowing rate and payment. Walking away from an affordable payment because the home lost value is a CHOICE.

On the other hand, it would cost NOTHING to forcing the major banks to borrow at today’s fed funds rate, refinance underwater loans first mortgages and seconds (even those they did not originate) and allowing them to sell the new longer term lower rate loans to Freddie and Fannie would lower payments and remove the danger of foreclosure from high rate predatory loans. It would stabilize the market. Payments would go down. It would make the investment more affordable but not magically transform the underwater house into a great investment. Look, the moment you drive a car off the dealer’s lot it loses value and cannot be sold for what you paid, but if the car apyment is affordable and you want to keep the car you continue making payments, same principle. One goal of TARP was to keep people from losing their homes, it was not to ensure they profit from them.
The inability to modify loans or reduce principal is not “my” impenetrable barrier thinking, it is unfortunately a fact. Read the SIGTARP reports. Banks only have to wait out HAMP a few more months.  To your final point, principal reduction is not necessary to accomplish a short sale or deed in lieu of foreclosure if your goal is “need to move to cheaper home”. This would allow them to avoid foreclosure and get out of their overpriced home without destroying their credit.

“ would cost NOTHING to forcing the major banks..”
For a bank holding the loan on books, The NPV of today’s higher coupon loan is bigger than same loan at lower coupon.  rate reduction is very much a loss.
one of the problems w/ “stagnation” in US housing is that properties and related loans haven’t been free to fall to their true market values… they’ve been propped up for variety of reasons.  I don’t expect a recovery in housing until this price adjustment happens, that assets/loans are re-booked at current prices, and—for homeowners—that loans on their homes are in line with true price buyer would pay to buy home today. 
any bank holding a note at 150% of property’s current price is loathe to change a thing.  because moment bank does the right thing and reduces loan to reality, it’s guaranteed a huge loss that afternoon.  we need Govt to make it happen, and I think it has to happen.  (thanks for your reply, and appreciate the back n forth)

@Tom..the banks are the borrowers. They lent you credit. The banks were lent hundreds of trillions in U.S. TAXPAYER money via the U.S. TREASURY DEPT.  That is why you have the stamped, paid deed in your possession. That is why the Origination Fraud occurred and there are no legal liens on our deeds because they never lent anyone any money. Everything is the opposite of what we were told to believe.  The truth is that it is the GSE ‘s and the financiers whose debt is an unsustainable $1.2 QUADRILLION dollars in fraud and can never be repaid no matter how much they are allowed to steal from us. The politicians and the MSM are covering up the truth. That is allowing the bankrupting of the American people and the theft of our National Sovereignty under the big lie and the guise of money lent.  This is no different than what the financiers did to Weimar Germany. The theft of our property rights being stolen under the color of law is no different than what the Soviets did in communist Russia. The 1% are being allowed to steal America under many guises AKA lies. The truth is those mortgage contracts do not exist and are not worth the paper they are printed on. Just like the currency. So long as the masses believe the lies and keep participating the fraud recycling and pocketing of our remaining wealth by the 1% will continue until we all wake up one day broke and homeless.

This article is part of an ongoing investigation:
Freddie Mac

Freddie Mac

The taxpayer-owned mortgage giant made investments that profited if borrowers stayed stuck in high-interest loans while making it harder for them to get out of those loans.

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