The DeMarco model

Edward DeMarco is a calm, collected man. He is soft-spoken and laughs politely when jokes are told. He is positive and polite; speaks clearly and gives others time to speak.

He is also one of the most powerful men in America as acting director of the Federal Housing Finance Agency. And 2012 was his year.

Because of his influence over housing during the past year, HousingWire named DeMarco its 2012 Person of the Year. But DeMarco isn’t willing to accept the honor on his own. He said he is only one part of a tireless team at FHFA, one which put into action dozens of indicatives this year alone.

“I am surprised and honored and I accept on behalf of the whole agency,” DeMarco said, “because it says something about the FHFA.”

Any great leader knows that for a system to be effective it must be created and structured in such a way those operations may continue unabated — even without that same leader who created it. DeMarco is doing just that.

So while DeMarco’s tenure may be in doubt, after all ‘acting director’ is by nature a temporary title, his legacy is not.

Years from now, when housing is optimized, lending responsible and mortgage finance adequately liquid and highly competitive, it is our hope that the industry will refer to “The DeMarco Model.”

“We’ve done a lot in the last 12 months,” DeMarco said. “Just in the last 12 months, give or take, we’ve hired two new chief executive officers, one at Fannie, one at Freddie, revamped the executive compensation structure for Fannie and Freddie in conservatorship, including a 90% reduction in pay to the CEOs and a 10% reduction for all the other senior executives.”

See page 38, for a list of other accomplishments.

The compensation changes bring the CEO pay for the GSE heads more in line with that of their boss, Edward DeMarco, who makes slightly more than $250,000 a year. In November 2011, DeMarco sat before the House Oversight and Government Reform Committee to face questions with then-CEOs, Michael Williams (Fannie) and Charles “Ed” Haldeman (Freddie).

The top 10 executives at Fannie and Freddie made nearly $13 million in performance bonuses in 2010. The committee then challenged the smaller income of the acting director. As a government employee, DeMarco’s salary was a mere smidgen of the GSE heads, who until 2008 were private-sector CEOs of large, powerful corporations making salaries that rivaled some of the largest companies in the nation. When pressed, DeMarco showed his deep connection to his civil duty, his sense of loyalty to the FHFA mission.

Committee Chair Darrell Issa, R-Calif., asked him if he was satisfied with his own compensation given the fact that he could take his expertise elsewhere for much more.

“I’m still here,” DeMarco responded.

In speaking to HousingWire, DeMarco discussed the strategic plan for the FHFA not just as regulator of Fannie and Freddie but as conservator. The foundation being set should work in the way securitization is really meant to work: It should be flexible and able to absorb ongoing rules and regulations.

But this would not be possible if the FHFA itself was not a tidily run operation. DeMarco points out that in the four years since inception, the FHFA passed all independent audits. The latest, conducted by the Government Accountability Office, concluded there is no material weakness in FHFA internal controls.

“So as you can see, we are safe and sound as regulators, that’s a key focus,” DeMarco said. “As conservator, we’ve got these fundamental responsibilities we’ve laid out. We’re really focusing on the future of the housing finance system. The way I would put it is, we are really looking forward to working with the administration and the Congress on rebuilding the country’s housing finance system,” he said.

“Whatever that means for Fannie Mae and Freddie Mac, or the Federal home loan banks, for that matter, is a decision for policymakers to make, but really a lot of things broke in 2008, with regard to the housing finance system.”

The extended conservatorship was not expected, DeMarco says, but it isn’t a bad thing either. The extended time provides the luxury of not making any more mistakes, of reconsidering the structure of housing finance to not letting history repeat itself.

DeMarco says it is a challenge. On the one hand, the two companies clearly couldn’t make the grade when the FHFA took over. So the GSEs needed to be developed into solvent companies.

So far, DeMarco’s model seems to be working. For the third quarter, Fannie Mae earned $1.8 billion in net income, compared with a net loss of $5.1 billion a year prior. The government-sponsored enterprise expects to report an annual profit in 2012 for the first time since 2006, the year before housing went into a tailspin. There was no draw from the Treasury during the third quarter.

Same for Freddie. Freddie Mac secured a significant profit in the third quarter as the company’s book of business improved along with the housing market, boosting the fundamentals associated with the agency’s loan pools.

The government-sponsored enterprise posted a net third-quarter profit of $2.9 billion, down slightly from $3 billion in the second quarter and a loss of $4.4 billion in the third quarter of 2011. Freddie also finished the third quarter without requiring additional draws on the Treasury and saw its inventory of delinquent loans fall to the lowest level in two years.

Some may say, with results like that, there is no incentive to change the housing model. DeMarco remains opposed to the notion that Fannie and Freddie are not incentivized to change and committed to his mission of an improved housing model. He said it can be a challenge, the expectation is that these two firms, which still issue securities that wrap 30-year debt, will need to be wound down.

The first part of the mission is getting the GSEs to profitability while the second is creating a system that can be shared.

“Any investment in the infrastructure of these two companies would cost the taxpayers money so we wanted to be smart to use those dollars once, especially if Fannie and Freddie are not going to exist in the future in their current form,” he said.

“We determined neither Fannie nor Freddie had a robust enough infrastructure to build, to be the foundation for the next generation or two, with regard to secondary mortgage markets.”

In doing so, in creating a single platform for all secondary players to play on, the platform must first be used by Fannie and Freddie and then extendable to other players.

“We are building it with a real eye to the long-term, with an open architecture, with consultation with market participants, so that this platform may be operated as something of a public utility that maybe other market participants can maybe avail themselves of in a competitive, post-conservatorship market.”

Spoken like a true lover of the DeMarco model of housing.

For more coverage of DeMarco and the FHFA, please read the full December issue of HousingWire magazine.

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