Are White House housing plans really stymied by the regulator for Freddie and Fannie?
by Cora Currier, ProPublica

March 28, 2012 12:28pm
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•  Obama has options he hasn’t tried

•  ‘Get someone in there who shares our view’

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 are too costly for the taxpayer-owned companies.

Frustrated by Demarco's stance, Democrats in Congress and some state attorneys general have called for his resignation. Representative Elijah Cummings 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 withdrawal of its nominee. The White House hasn't named a potential replacement since. It also passed over the chance for a recess appointment this 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. There have been cases where heads of independent agencies have stepped down amid controversy -- former SEC chair Harvey Pitt did so in 2002. But even that is rare.

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

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

Even if the president did pressure DeMarco to step down, all he'd get would be one of his deputies as another acting director, which is no guarantee of a shift in policy.

The Obama administration may think that it couldn'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 takes 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 be in tension 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 will 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 -- what seems to be a new argument for him.

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