Rep. Frank joins calls for top Fannie, Freddie regulator to be replaced

Rep. Barney Frank has joined the growing chorus of Democrats calling for the removal of the nation's leading housing regulator.

The Massachusetts Democrat said Edward DeMarco, head of the federal agency that oversees Fannie Mae and Freddie Mac, has been "too rigid" in his approach to foreclosure prevention and should be replaced.

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"He's been too rigid in refusing to help on foreclosures," Frank, the ranking member of the House Financial Services Committee, said Wednesday. 

"He's acting as if he was head of two private companies called Fannie and Freddie and not taking into account the impact this has on the economy, and I think he should be more cooperative with efforts to reduce foreclosures."

Asked if DeMarco should go, Frank said, "Yes. ... since he won't be more flexible, yes."

But Frank was also quick to concede that replacing DeMarco is no guarantee the Federal Housing Finance Agency (FHFA) would adopt the more aggressive foreclosure-prevention policies DeMarco's critics have urged.

Instead, because Senate Republicans would likely block any permanent replacement President Obama nominated, the White House would be required, by law, to seat one of DeMarco's top FHFA deputies – officials who support DeMarco's strategies, Frank said, and would likely continue the same foreclosure policies that have so angered Democrats and housing advocates.

"If they got rid of DeMarco they'd have to replace him with one of the other three [FHFA] division heads, who'd be the same as him," Frank said. "The president could only replace DeMarco with somebody who would be probably more rigid than DeMarco."

The whirlwind surrounding DeMarco and the FHFA has been swirling for months as millions of homeowners remain underwater, the housing market remains volatile and the Obama administration's efforts to provide relief have fallen far short of their targets.

As head of the FHFA — an independent agency created in 2008 to respond to the plunging housing market — DeMarco is charged with protecting the taxpayers, who bailed out Fannie and Freddie to the tune of roughly $160 billion. That part is not in dispute. Where DeMarco and his critics differ is how the FHFA can best accomplish that task — an argument that's recently revolved around the issue of principal write-downs.

DeMarco has said repeatedly that he has authority to reduce mortgage principal to prevent foreclosures, but won't use it because it's the least effective way to protect the taxpayer's investment in Fannie and Freddie. Instead, he's focused the FHFA's anti-foreclosure efforts on cutting interest rates, extending the length of loans and offering principal forbearance. Those strategies, he says, strike the proper balance between helping homeowners, protecting taxpayers and avoiding moral hazard.

"What FHFA has consistently found in its analysis is that ... those tools work better than ... [principal reduction] with regard to our fundamental mandate of conserving and preserving [Fannie and Freddie]," DeMarco told a Senate panel earlier this month.

Critics of that position, including a long list of Democrats and housing advocates, disagree, maintaining that FHFA should reduce principal balances for those homeowners threatened most by foreclosure. The resulting market stabilization, they argue, would also benefit Fannie and Freddie — and therefore the taxpayers DeMarco is charged with serving.

"It can't be that that [principal forgiveness] would never be right," Frank said. "He's in charge of the largest amount of residential property in America. It can't be in his interest in this crisis not to stabilize it [the housing market]."

Frank was quick to praise DeMarco's business acumen, saying he's done a "very good job" stabilizing Fannie and Freddie. But his unwillingness to prevent more foreclosures for the sake of the broader economy, Frank added, is a mistake.

"Since it's been in a conservatorship, we're not losing any money. The new loans they are making have been solid," Frank said. "He's done a very good job of running it, but he has been too rigid about the impact that it has on the economy."

Frank emphasized that the controversy surrounding DeMarco's approach to principal reduction is not a legal one.

"He has not tried to claim that he has no legal authority to do that," Frank said. "It's a policy choice and, I think, a mistaken one."

Democrats are pointing to reports indicating that private mortgage lenders are using principal reductions as a way to protect their investments. If that strategy is good enough for Wall Street, they ask, why not for Fannie and Freddie?

"They're finding it profitable on their own portfolios to do principal write-downs," a Senate Democratic staffer said Friday. "It doesn't make a damn bit of sense not to do any principal reductions [at FHFA]."

Edward Pinto, a fellow at the American Enterprise Institute (AEI) and formerly an executive vice president of Fannie Mae, had another take. He conceded private lenders are pursuing principal forgiveness, but usually only in cases when homeowners are hopelessly swamped as a result of taking out negative amortization and other exotic loans — arrangements Fannie and Freddie largely avoided, he said. With that in mind, Pinto said, DeMarco is correct to avoid principal reductions.

"His math and analysis is accurate," Pinto said. "It would be very expensive to do this [at FHFA]."

On Thursday, members of the Senate Banking Committee will examine that issue. The hearing, a joint effort between Banking's housing and securities subpanels, will feature testimony from FHFA's inspector general, as well as private lenders who are using principal forgiveness to protect investments.

Under the law, FHFA directors serve for five-year terms, while acting directors serve indefinitely, until a director is nominated and confirmed by the Senate.

Obama's one stab at filling the vacancy atop FHFA ended in failure. In November of 2010, the president tapped North Carolina Banking Commissioner Joseph Smith to head the agency, but Senate Republicans — notably Sen. Richard Shelby (Ala.), the ranking member of the Banking Committee — blocked the appointment.

Smith withdrew from the running two months later, and Obama has so far declined to nominate another figure.

The White House on Friday declined to comment for this story.

John Taylor, president and CEO of the National Community Reinvestment Coalition, a housing advocacy group, said it wouldn't benefit Obama to remove DeMarco until he's certain the replacement would focus more intently on foreclosure prevention.

"The process shouldn't just end up with the next in line [at FHFA]," Taylor said Friday. "He needs to get to the point where he's got somebody on the same team."

Some Democrats and advocates have urged Obama to replace DeMarco using a recess appointment, like the president did in January when he named Richard Cordray to head the new Consumer Financial Protection Bureau (CFPB).

But Frank said it’s unlikely Obama would take that controversial step twice.

"Having done the CFPB recess, he doesn't want to do another one," Frank said.

Meanwhile, some housing advocates fear the debate over FHFA's anti-foreclosure efforts could become overly political at the expense of struggling homeowners. 

David Abromowitz, a housing lawyer and senior fellow at the Center for American Progress, said he's worried the foreclosure-prevention issue will "get sidetracked" by a "partisan fight over the powers of the president." 

"If this becomes a question of whether Obama can or can't get an appointment versus [whether] FHFA is doing a good job," he said, "then we'll lose a window of time when we could be preventing foreclosures."

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