Edward DeMarco, the acting director of the agency that oversees Fannie Mae and Freddie Mac, is a man who inspires passion on both sides of the housing policy debate.
If you are a liberal Democrat trying to salvage something from the wreckage of the disastrous Obama housing policy, then DeMarco is your foe. You want a bigger government role in fixing the housing mess regardless of the cost. If you are a conservative Republican trying to reduce the role of the state in housing or at least make the government-sponsored enterprises accountable to taxpayers, then Ed DeMarco is a hero.
Liberals from economist Paul Krugman to Wall Street voices such as New York-based economist Constance Hunter have been calling for principal reductions on underwater mortgages and expanded rental programs. They want President Obama to replace DeMarco via a recess appointment to make this possible. “I am very surprised there wasn’t a firing and a recess appointment (with DeMarco),” laments Hunter. “We need to focus the conversation on creative solutions” to the housing crisis.
But there are plenty of Washington observers who applaud DeMarco for refusing to cave into the White House and members of both parties in Congress desperately seeking ways to revive the good old days of housing. Housing, lest we forget, was an equal opportunity employer in Washington for decades.
“DeMarco followed his legal mandate to keep the cost of Fannie and Freddie under control,” notes the head of one of the largest nonbank loan originators in the U.S. “Operationally, Fannie and Freddie have screwed up just about everything they’ve ever touched. DeMarco was right to reject calls for expanded rent-to-own programs and principal write-downs given his mandate to reduce the cost to taxpayers.”
Cliff Rossi, former chief risk officer of Countrywide and later at Citigroup’s consumer lending unit, now at the University of Maryland business school, lionizes DeMarco: “I’m a big fan of the guy. He’s not politically motivated, but instead does what he believes is in the best interest of the taxpayer. Regardless of what side of the fence folks sit on the GSE issue, you may think he’s dogmatic in his position, but I fundamentally believe it is based on well-thought-out policy analysis. DeMarco’s motivations, I believe, are well-intentioned and have the taxpayer’s interests squarely at heart.”
One of the most senior Republican staffers on Capitol Hill puts it simply: “DeMarco has done an extraordinary job of doing his job which is basically an impossible job. The Obama administration and congressional Democrats have been trying to cut him off at the knees, then the waist, and then the neck.”
Alex Pollock of American Enterprise Institute says DeMarco has shown “remarkable independence and character” in resisting calls from the left to increase risk at Fannie and Freddie.
Mark Calabria at Cato Institute, who previously worked for the Senate Banking Committee, says DeMarco has done as well as anyone could in the position.
“I don’t agree with every decision, but (DeMarco) appears to be one of the few people in D.C. that shows some respect both for the law and the taxpayer. Far better than anyone Obama would have put in place.”
Dean Baker, an American macroeconomist and co-founder of the Center for Economic and Policy Research, chides DeMarco’s inaction on underwater mortgages in the face of the sharp drop in home prices.
“I think its nuts that DeMarco won’t do any write-downs. I also don’t understand why Fannie and Freddie have not been more vigorous in promoting rental options, which are on their books, for foreclosed homeowners.”
Baker believes that Fannie and Freddie should be moving more foreclosed and other homes into rental schemes, a popular strategy option and one that also has the added benefit of reducing the realized losses to the GSEs. Only when a home owned by a GSE is sold does the loss hit the agency’s books. But critics of Fannie and Freddie point out that the existing rental programs are hardly a success and that principal write-downs would be even more of a disaster.
Anthony Sanders of George Mason University lauds DeMarco: “Given his charge of protecting taxpayers against further losses, DeMarco has done a superb job standing up to political pressures to perform economically questionable principal write-downs. In fact, he is the one regulator that actually did what he was supposed to do.”
But perhaps the most compelling endorsement of DeMarco comes from Chuck Gabriel of CapitalAlpha Partners. He told HW:
“I think Ed is a hero. He has emerged as one of the most forward-looking of federal regulators under the most difficult of circumstances. As a former GSE apologist, I used to be a critic, but I’m one of DeMarco’s biggest fans today. His past two years’ adherence to the letter and spirit of HERA (the bipartisan 2008 GSE reform law that transformed and empowered his agency) has generated major political heat. The Obama administration and Hill Democrats, having badly underestimated the housing crisis, have tried to force DeMarco to abandon his balanced read of his HERA conservatorship mandate.
DeMarco’s refusal to dial up the GSE risk meter (pursuant to the left’s read of broad language in the subsequent and highly partisan Obama stimulus bill of 2009) has created the kind of histrionics and drama worthy of a cable TV series.”
Gabriel continues: “Perhaps most impressive, however: Not only has DeMarco had the guts and grace to withstand the Obama administration’s coercion and bullying, but his efforts to produce a unified platform, or ‘single national securitization infrastructure,’ for a post-GSE-reform regime — one suitable for accommodating any new plan that Congress might ultimately settle on — have reflected a professionalism, and sense of his agency’s role, that you seldom see.”
Gabriel notes that resistance to the GSE regulator’s mission has shifted widely. The old OFHEO faced resistance from the right, which wanted it to be tougher on Fannie and Freddie throughout most of the agency’s early years and adolescence (1993-2007). Since it became the more empowered FHFA at the outset of the financial crisis in 2008, however, its political critics have largely come from the left, and have wanted the agency to ease up. Thus the cacophony of voices in support of mass refis, principal forgiveness, and other homeowner relief/foreclosure mitigation plans.
Even DeMarco’s critics would have to admit that he has been consistent and principled — perhaps most notably in the dialectic that ultimately saw him approve the HARP 2.0 refinancing streamlining changes last October; and, more recently, in his publicly disclosed reasoning against GSE principal forgiveness.
One could even argue, Gabriel and others point out, that it was more than a strict reading of the law that led Treasury Secretary Timothy Geithner to back off exploratory efforts and threats to fire DeMarco last summer. It would have been indefensible to fire an “independent” regulator forthrightly doing his job, no matter how politically inconvenient his actions have been.
Meanwhile his stubborn resistance may not have made him popular, but it has likely ensured against GSE mission creep during what could still prove a long interregnum before Congress ultimately considers a new “post-GSE” housing finance reform plan.
Krugman lambasted DeMarco with his usual partisan whining in an August 2012 column in The New York Times: “ [T]he DeMarco affair nonetheless demonstrates, once again, the extent to which U.S. economic policy has been crippled by unyielding, irresponsible political opposition,” in effect painting DeMarco as part of the GOP’s obstruction of Obama housing policies.
But, in fact, President Obama and his entire White House staff took their queues on housing from Moody’s economist Mark Zandi, who famously told everyone from the Federal Reserve Board to Capitol Hill that the mess in residential housing would “heal itself.” Amid all of the bad advice and even worse policy, Ed DeMarco did his job. The sole achievement of the Obama administration over the past four years is shielding the large banks from any sort of reckoning, including a meaningful solution to the big problem of underwater mortgages.
Christopher Whalen is a regular columnist for HousingWire and senior managing director of Tangent Capital Partners in New York where he provides advisory services focused on companies in the financial services sector. He is co-founder and vice chairman of the board of Lord, Whalen LLC, parent of Institutional Risk Analytics, a provider of bank ratings, risk management tools and consulting services.
