A couple weeks ago I was having a beverage with a former comrade from the trenches of mortgage research (He’s now a big money manager). My comrade took me to task for criticizing outgoing Federal Housing Finance Agency Acting Director Edward DeMarco’s performance at a September congressional hearing on the GSEs. What did I expect? he asked. Congressional Banking Committee leadership had just sandbagged DeMarco for courageously going after the banks that issued the private-label mortgage securities rotting in Fannie and Freddie’s portfolios. Sandbagged? How’d I miss that? I’m no Lois Lane, but I do love a scoop. Sure, he explained, right after the banks got those 64 subpoenas, Dodd, Frank & Co. pressured President Obama to get a permanent FHFA director. Wow. I called for another beverage. It had not struck me that those subpoenas were an act of courage. And I’d missed all signs of congressional activity. Gosh, slapped by big guns of both parties. As my friend had intended, I felt sympathy for DeMarco, outrage on his — and our — behalf, and remorse that I’d missed a good story. So, I retorted, what about the nominee for permanent FHFA head? He looked blank. I felt so much less flat-footed. The North Carolina banking commissioner, I said. (The Senate Banking Committee this week approved President Obama’s nominee, Joseph Smith, as director of the FHFA, the conservator of government-sponsored enterprises Fannie Mae and Freddie Mac.) So, my friend asked, he’ll be a shill for the banks? He always did have that pessimistic streak. Or is it realistic? Is the government — both sides of the aisle in Congress and the administration, too — that biddable where the banks are concerned? That’s a rhetorical question. Thousands upon thousands of words can be written illustrating that government is biddable, buyable and sneaky in the service of the financial industry. Let’s focus on the matter at hand, what I like calling the “DeMarco affair.” DeMarco makes himself a target On July 12, acting as GSE conservator, FHFA “issued 64 subpoenas to various entities, seeking documents related to private-label mortgage-backed securities (PLS)” in which the two GSEs had invested. By documents, FHFA meant loan files and other transaction documents. Apparently, the GSEs had been working “for many months” to obtain documents that would permit them to determine if the loans and/or the servicing of the loans met required standards. “The documents will enable FHFA to determine whether PLS issuers and others are liable to the enterprises for certain losses they have suffered on PLS. If so, the conservator expects to recoup funds, which would be used to offset payments made to the enterprises by the U.S. Treasury.” The subpoenas were issued under authority granted FHFA by Congress. Entities subpoenaed had 30 days to comply. If they refused, FHFA would consider its legal options. “Congress granted the conservator broad powers to enforce its subpoenas.” Those powers, by the way, were granted by The Housing and Economic Recovery Act of 2008 (HERA). Purely speculation on my part, but I wouldn’t be surprised if an angry Congress wasn’t thinking more about subpoenaing GSE employees than private issuers. The New York Times’ Gretch Morgenson heralded the agency’s move as “unusually aggressive” for Washington. She didn’t see trouble ahead, but she did note that “while some in Washington have continued to coddle the big banks even after they drove our economy into the ditch, this agency seems serious about recovering money for taxpayers by holding bad financial actors to account.” There was a letter Finding hints from Internet-based media and blogs that congressional banking pols pulled the rug out from under DeMarco is tough, but it is there — in a letter. Senate Banking Committee Chairman Chris Dodd (D-Conn.) and ranking member Richard Shelby (R-Ala.) wrote the president on July 28 to urge him to find a permanent director for FHFA. However, although it was a letter, signed by banking bulldogs from both of the warring parties, and clearly was meant seriously, it was not accompanied by a press release. Ponder this: Press releases and grandstanding before cameras and microphones are about all we mere citizens see of the shenanigans in the halls and bars of power in our nation’s capital. Without C-SPAN and hearings, we’d be blind. Think of all the phone calls, e-mails and cables, the meetings and negotiations between staffs, the variety of contacts with lobbyists that we, and the media that give us “the news,” never ever get wind of. We — the taxpaying electorate — just see the tip of the iceberg. Dodd & Shelby’s main points:
- It has been two years since the Federal Housing Financing Regulatory Reform Act of 2008 created FHFA, and as yet it has no permanent director.
- The acting director, who acts under the terms of the conservatorship with all the powers of the shareholders, directors and officers of the GSEs, has “served well under difficult circumstances,” but a permanent director should be appointed and confirmed.
The first point is misleading. Had they been looking for a fight, they might have said Obama had been in office for 18 months without naming a permanent director. As a matter of fact, FHFA did have a director under President Bush. James Lockhart was appointed director of the Office of Federal Housing Enterprise Oversight, or OFHEO, in 2006 before FHRRA overhauled it to make FHFA. He was carried over as director of FHFA, stepping down in August 2009. Likewise, DeMarco, also in 2006, a career civil servant, with experience in the Social Security Administration, as director of the Office of Financial Institutions Policy in the Treasury Department, and the U.S. General Accounting Office, had been appointed deputy director of OFHEO. When Lockhart stepped down, Bush named DeMarco acting director. With grandstanders in both parties rattling their swords at Fannie and Freddie, it was probably a safe strategy for a conciliatory administration to leave a Bush man in place for a year and a half. Especially one as focused as DeMarco on saving a buck for the taxpayers. Who could fault that objective? (Again, a rhetorical question.) Did Barney Frank scourge DeMarco? Since the letter went below the radar, the media seems to have missed that a fix was going in. The exception might be “Frank has bank scourge DeMarco’s Back” an Aug. 13 post on HuffPost Hill. However, aside from the headline, House Finance Committee Chairman Barney Frank’s (D-Mass.) role is never explained. HuffPost Hill reports that “after (FHFA) head Ed DeMarco began to try to force banks to take back loan losses … Chris Dodd and Richard Shelby suggested in a letter it might be a good time to replace the acting director with a new person. The message was clear, but DeMarco hasn’t backed off.” At the same time, HuffPost reported Rep. Brad Miller (D-N.C.), was circulating a letter in support of DeMarco. The following week HuffPost Hill reported that Reps. Paul Kanjorski (D-Pa.), chairman of the Subcommittee on Capital Markets and Jackie Speier (D-Calif.) added their signatures to Miller’s letter. That letter is dated Aug. 13. That letter, issued with a press release, is easy to find in the newsroom on the committee’s website. The authors remind the president that it is critically important to protect taxpayer funds. As well, “It is equally important that the American people know that their government is acting on their behalf, not on the behalf of financial institutions. The failure to pursue legitimate legal claims to limit losses to taxpayers would be another indirect subsidy for an industry that has received too many such subsidies already.” The letter closes with this straightforward directive: “As you consider the nomination of a permanent FHFA director, we ask that you take appropriate steps to assure that efforts to investigate legal claims to limit taxpayer losses from the enterprise’s conservatorship will continue to be pursued vigorously.” There’s also a missive from Chairman Frank, dated Aug. 20, what my friend called Frank’s backside-protecting, me-too letter. Readers may serve themselves. PACE does not stand for peace The HuffPost Hill blurb also makes an incoherent (to this reader) reference to people in California being furious with DeMarco because he wouldn’t take the PACE loans (Property Assessed Clean Energy). I haven’t been up to speed on this learning curve, so I’ll relay from pacenow.org: PACE is a bipartisan local initiative that allows property owners to finance energy efficiency and renewable energy projects on homes and commercial buildings; financing is repaid through assessments on their property taxes for up to 20 years. I gather, from various sources, that $150 million in stimulus money is also involved. In other words, a lien is created. Earlier last summer, FHFA refused to allow Fannie Mae and Freddie Mac to accept mortgages on properties with PACE liens because “such loans acquire a priority lien over existing mortgages” in most localities. These first liens “represent a key alteration of traditional mortgage lending practice” and pose “unusual and difficult risk management challenges for lenders, servicers and mortgage securities investors.” This is consistent with the GSE charters and the conservators responsibilities by law, but it would seem to put DeMarco at odds with the administration. Indeed, everyone from California Gov. Arnold Schwartzenegger and New York City Mayor Michael Bloomberg to various congressmen including Frank and the administration tried to talk FHFA down from its position. One never knows, but perhaps the PACE prequel hardened hearts to DeMarco. Scourge, part two As far as I can tell, it was only last month, when the administration announced it was nominating Joseph Smith, North Carolina commissioner of banks since 2002, as permanent director that the financial press latched onto DeMarco’s bipartisan assassination. Under the headline, “Replacing Fannie overseer may limit loan putbacks, Rosner says,” Bloomberg reporters Jody Shenn and Lorraine Woellert cited Graham Fisher & Co. analyst Joshua Rosner’s view that DeMarco is “very aggressive” and has a strong belief in what the role of conservator should be. “I’m not sure a political appointee without as much experience will be as devout.” Shenn and Woellert did a savvy thing: They also followed the North Carolina connection and contacted Rep. Miller, DeMarco’s supporter in the House, who provided a history lesson: “There was concern in the early summer that DeMarco would be pushed out for someone more sympathetic to the banks.” Shenn and Woellert do not report whether Miller thought Smith would side with banks. But he did tell the reporters, “I very much hope Joe will continue to pursue any potential liability that will reduce taxpayers’ ultimate loss.” Postscript: DeMarco isn’t going away The Senate has until the end of December to vote on Smith’s nomination. And, considering the tepid (reported) response to his nomination, it’s hard to believe it won’t pass. If it does, Smith stays on in his current post until March 31. If and when Smith goes to Washington, DeMarco drops back into his old job as No. 2.