The time has long since arrived for Edward J. DeMarco to pursue his other opportunities in the private sector, whatever they may be.
DeMarco, you may recall, is acting head of the Federal Housing Finance Agency, the government entity that oversees Fannie Mae and Freddie Mac, the pair of gargantuan mortgage companies that collectively own or guarantee most of the nation's home loans, giving them outsized influence over the American economy.
For many months, evidence has mounted that the most expedient way to move the country past the slow motion agony of the foreclosure crisis is to forgive substantial loan balances for the millions of homeowners who are underwater, meaning they owe the bank more than their homes are worth. The Obama administration finally wants this to happen, after opposing this approach early on. Housing experts have been calling for this course for years.
Yet almost single-handedly, DeMarco has prevented this from happening on a large scale. He has refused to allow Fannie and Freddie to engage in principal reduction while ordering up intellectually dishonest analysis purporting to show that taxpayers are best served by the existing assortment of policies -- a course that has produced blight, dislocation and economic stagnation.
DeMarco has held the line because he cares more about the principle -- in this case, the supposedly sacred obligation of debt repayment -- than about the societal consequences of too much principal. As I have written here before, DeMarco is a bleeding-cash conservative, an ideologue so keen on punishing those he views as morally derelict -- people who can no longer pay their bills -- that he is willing to squander taxpayer dollars toward ensuring that they suffer the ultimate penalty: relinquishing their homes.
All of this has been clear for months. But thanks to DeMarco's breathtaking brush-off of the Obama administration last week as he brazenly dismissed analysis from his own agency showing that principal reduction would save taxpayers up to $1 billion, the recklessness of his position has become so conspicuous that even Treasury Secretary Tim Geithner has apparently lost patience.
In a letter sent to DeMarco last week, Geithner chided the FHFA chief for his continued refusal to green light principal reduction at Fannie and Freddie, asserting that it "would provide much needed help to a significant number of troubled homeowners, help repair the nation's housing market and result in a net benefit to taxpayers."
This is particularly rich given how Geithner once played DeMarco in a previous incarnation. Back when the administration crafted its feeble loan relief offering, Home Affordable Modification Program, better known as HAMP, Geithner ensured that principal reduction was not part of the mix.
"This is a conscious choice we made, not to start with principal reduction," Geithner said in 2009 as he testified in front of the Congressional Oversight Panel, which kept tabs on government bailouts. "We thought it would be dramatically more expensive for the American taxpayer, harder to justify, create much greater risk of unfairness."
That assertion drew a prescient critique from the panel's chairwoman, the consumer finance watchdog Elizabeth Warren. She suggested the program would "just kick the can down the road," adding, "We'll be looking at an economy with elevated mortgage foreclosures not just for a year or two, but for many years."
That's indeed what we're looking at. Now Geithner has finally come around to principal reduction only to confront DeMarco invoking the same wrong-headed arguments that he used to make.
All of which raises a pertinent question: What does the White House plan to do about DeMarco and his ideological insurgency? Faced with his open defiance of common sense and taxpayer interest, does the administration intend to move him out of there and replace him with a force for good?
The administration has long refused to answer this question publicly. That did not change this week. The White House made available a "senior administration official" who spoke on condition that he not be named, while pointing out the myriad ways the administration is supposedly blunting the foreclosure crisis through means that do not depend on DeMarco's cooperation -- by increasing principal reduction within the HAMP program, pushing mortgage companies to do likewise through the multi-state foreclosure settlement and by ramping up a government program to help distressed borrowers refinance into affordable mortgages.
Better than nothing, but it still begs the question. DeMarco runs the two biggest mortgage entities, so he has the greatest influence. Now he has told us to quit waiting for principal reduction. It's never going to happen on his watch. He has to go.
Cue the tiresome complaint that principal reduction is unfair. What about people who have been paying their bills on time for years? Why should they have to pay to rescue borrowers who got in trouble? The latest act to cover this song is Anthony B. Sanders in a Bloomberg View opinion piece that implores us to "Stop Bashing DeMarco."
"Why should federal taxpayers be held responsible?" Sanders asks. "Someone in Texas shouldn't be paying for someone's principal reduction in California." (Bloomberg identifies Sanders as a professor of finance at George Mason University, assuring us that "The opinions expressed are his own," but neglects to mention his history of testifying as an expert witness for major Wall Street investment firms that are fond of helping themselves to taxpayer bailouts, but less fond of forgiving loans to ordinary people -- Wachovia, Merrill Lynch, UBS. But I digress.)
People in Texas are already paying for the troubles of people in California, as makes sense in a nation that has the word "United" in its name fairly prominently. We are all on the hook for the foreclosure crisis, because it has damaged the economy and worsened unemployment, jacking up the bill for food stamps, unemployment benefits, Medicaid and other federal programs.
Joining together to fix collective problems is a basic tenet of society. When 911 dispatchers get calls for an ambulance, they don't stop to ask whether the person in distress can pay, or whether the injury is his or her fault: Did the person get that heart attack from eating too many cheese steaks, contrary to doctor's orders? We send the ambulance and sort out the details later.
Many of the people who took on more house than they could afford were really just guilty of bad timing, anyway, needing homes a couple of years too late. People who bought at market prices in 2000 and stayed put now look like paragons of prudence, while those who had kids in 2005 and paid market rates for extra space near good schools now get condemned as gluttons who had it coming.
Fairness is complicated, even when we restrict the conversation to regular people. Throw in the Wall Street banks that created the mortgage disaster and still got bailed out and fairness as an argument against principal reduction sounds like a euphemism for crucifying the powerless.
DeMarco is not big on complexity. In his world, homeowners agreed to pay. If they pay less and still manage to hang on to their homes we might as well sanction bestiality. He is the wrong man for the wrong job at the wrong time. The White House needs to mount an intervention.
Previously, Obama administration officials have suggested that they can't shove DeMarco aside because he is the head of an independent body, albeit only the acting head. Last year, the administration nominated Joseph Smith, North Carolina's respected banking commissioner, as replacement for DeMarco, only to run into obstructionist Republicans in the Senate who stonewalled and enabled DeMarco to carry on.
There is a simple way to end this impasse: The Obama administration can make a recess appointment, circumventing the Senate. In the run-up to the November election, the White House apparently has no appetite for the food fight that would result. But the alternative is more of what we have had from this administration since its inception -- feckless housing policy that perpetuates the foreclosure crisis through half-measures while hoping for better.
It's hard to understand how the status quo makes for good politics, anyway. "Vote for me. Things are lousy, but that's because the other party sabotaged the fix," hardly resounds like a winner. Yes, the Republicans have cynically monkey-wrenched the economy to try to damage Obama's reelection prospects, but housing is one area where the president has the authority to make a difference. He needs to use that authority. DeMarco is in the way.
Back in March, the former Obama administration economic adviser Jared Bernstein -- an advocate for principal reduction -- said it was still too early to call for DeMarco's ouster. Treasury had recently tripled the incentives it was willing to pay for mortgage holders who agreed to forgive principal balances. Bernstein suggested we ought to wait to see how DeMarco would respond to that inducement.
Now, that response is clear. DeMarco will not be swayed by facts, badgering threats or pragmatism. Like Dick Cheney, he seems invigorated by opposition, taking widespread criticism as proof of his courageous stand.
"The guy needs to step aside," Bernstein now says in a blog post. But stepping aside is not part of DeMarco's makeup. Like the millions of homeowners he has consigned to such fate, he needs to finds the marshals at his door.
Below are some of Ed DeMarco's allies and enemies:
Nobel Prize-winning economist and New York Times columnist has repeatedly called for FHFA director <a href="http://krugman.blogs.nytimes.com/2012/07/31/fire-ed-demarco/" target="_hplink">Ed DeMarco to be fired</a> over his his opposition to principal reduction. In addition to arguing that principal reductions would benefit the overall economy, Krugman told his readers that "deciding whether debt relief is a good policy for the nation as a whole is not DeMarco's job."
Treasury Secretary Timothy Geithner stated that principal reductions would help up to 500,000 homeowners and save taxpayers up to $1 billion, in <a href="http://www.huffingtonpost.com/2012/07/31/ed-demarco-principal-reduction_n_1724880.html" target="_hplink">a letter he wrote to Ed DeMarco. </a> He also wrote that DeMarco's resistance to principal reductions was not "the best decision for the country, because, as we have discussed many times, the use of targeted principal reduction by the GSEs would provide much needed help to a significant number of troubled homeowners, help repair the nation's housing market, and result in a net benefit to the taxpayer."
Rep. Elijah Cummings is less than thrilled by Ed DeMarco's decision not to provide principal reductions. Cummings wrote in <a href="http://www.huffingtonpost.com/2012/07/31/ed-demarco-principal-reduction_n_1724880.html" target="_hplink">an email</a>: <blockquote>"It is incomprehensible that Mr. DeMarco would reject the chance to save up to a billion dollars in taxpayer funds while helping nearly half a million homeowners stay in their homes," Cummings said. "He should immediately withdraw this reckless and misguided letter and start following the law Congress passed."</blockquote>
President George W. Bush's Chairman of the Federal Housing Finance Agency, James Lockhart (seated to the far right), has argued that the FHA ought to experiment with principal reductions, <a href="http://thehill.com/blogs/on-the-money/1091-housing/225101-cummings-housing-regulator-fhfa-wasting-taxpayer-money-by-refusing-principal-forgiveness" target="_hplink">the Hill reports.</a> "Foreclosure is not the answer. ... We're destroying neighborhoods with foreclosures."
Senate Majority Whip Richard Durbin (D-IL) told reporters that he believed DeMarco's decision was "short-sighted" and "an abdication of his responsibilities, " <a href="http://thehill.com/blogs/on-the-money/banking-financial-institutions/241343-fhfa-opts-against-principal-mortgage-reductions" target="_hplink">the Hill reports.</a> "The alternative to principal reduction is foreclosure -- a disastrous outcome for homeowners, taxpayers and the American economy. It is way past the time for leadership to stabilize our real estate market."
Secretary of Housing and Urban Development, Shaun Donovan, has urged the use of principal reductions to prevent foreclosure, <a href="http://thehill.com/blogs/on-the-money/1091-housing/225101-cummings-housing-regulator-fhfa-wasting-taxpayer-money-by-refusing-principal-forgiveness" target="_hplink">the Hill reports.</a>
William Dudley, president of the New York Federal Reserve, argued for the development of an earned principal reduction program for borrowers who are underwater but still making mortgage payments, <a href="http://www.newyorkfed.org/newsevents/speeches/2012/dud120106.html" target="_hplink">In a speech to the New Jersey Bankers Association. </a>
International Monetary Fund managing director, Christine Lagarde, argued that the U.S. should implement some form of mortgage relief, including principal reduction, in <a href="http://www.huffingtonpost.com/anna-cuevas/imf-lends-support-to-loan_b_1447133.html" target="_hplink">a speech she delivered at the Brookings Institute earlier this year.</a>
The Obama administration has long supported principal reductions, arguing that such write-downs would reduce delinquencies, help 11 million underwater borrowers and help get the housing market back on track, <a href="http://www.reuters.com/article/2012/05/10/us-usa-housing-donovan-idUSBRE8491DW20120510" target="_hplink">Reuters reports.</a> Under DeMarco's directorship, the FHFA blocked the White House's idea for home-energy improvement when it told firms not to participate, <a href="http://www.washingtonpost.com/politics/edward-j-demarco/gIQAK9StKP_topic.html" target="_hplink"><em>the Washington Post</em> reports.</a> President Obama attempted to replace DeMarco with North Carolina banking commissioner Joseph Smith in 2010, only to be rebuffed by Senate Republicans who refused to confirm Smith, leaving DeMarco in place.
House Government Reform and Oversight Committee Chairman, Rep. Darrell Issa (R-CA), wrote a letter to DeMarco urging the FHA director to "carefully evaluate relevant information prior to making a decision that could cost taxpayers billions if the government were to pay down the principal value of underwater mortgages for select homeowners," <a href="http://thehill.com/blogs/on-the-money/1091-housing/225383-house-republicans-urge-housing-regulator-to-remain-steadfast-on-principal-reductions" target="_hplink">The Hill reports.</a>
Chairman of the House Financial Service Committee, Rep. Spencer Bachus (R-AL), told reporters that Ed DeMarco stood up for "the best interests of the American people" by rejecting principal reduction, <a href="http://www.nytimes.com/2012/08/01/business/us-agency-bars-fannie-and-freddie-from-reducing-principal.html" target="_hplink"><em>The New York Times</em> reports.</a>
Sen. Bob Corker (R-TN) <a href="http://www.corker.senate.gov/public/index.cfm?p=News&ContentRecord_id=f3d4c62d-0f70-42fc-b485-99d0bb6b05b4" target="_hplink">thanked Ed DeMarco</a> for "making his decision based on objective analysis and with the taxpayer in mind."
ABA executive vice president on mortgage policy, Bob Davis, announced the association's support for Ed DeMarco's rejection of principal reduction, <a href="http://thehill.com/blogs/on-the-money/banking-financial-institutions/241343-fhfa-opts-against-principal-mortgage-reductions" target="_hplink">the Hill reports.</a> "As FHFA's research illustrates, principal reductions do not measurably help troubled borrowers avoid foreclosure, yet increase the cost to taxpayers at a time when our nation's fiscal situation is already strained."
Acting director of the Federal Housing Finance Agency, Ed DeMarco, announced to Congress that he would <a href="http://www.huffingtonpost.com/2012/07/31/ed-demarco-principal-reduction_n_1724880.html" target="_hplink">not permit mortgage giants Fannie and Freddie Mac to assist struggling homeowners by reducing their principal.</a> In a letter DeMarco sent to Congress, the acting director stated that he did not believe that there would be a substantial financial benefit to the taxpayer and that reducing principal would introduce "moral hazard" into the housing market. "This could give borrowers who are current on their mortgages a message that the government endorses forgiving a portion of mortgage debt if hardship can be demonstrated, creating a very broad incentive for underwater borrowers to seek ways to become eligible." Under DeMarco's directorship, the FHFA blocked the White House's idea for home-energy improvement when it told firms not to participate, <a href="http://www.washingtonpost.com/politics/edward-j-demarco/gIQAK9StKP_topic.html" target="_hplink"><em>The Washington Post</em> reports.</a> President Obama attempted to replace DeMarco with North Carolina banking commissioner Joseph Smith in 2010, only to be rebuffed by Senate Republicans who refused to confirm Smith, leaving DeMarco in place.<a href=" Under DeMarco's directorship, the FHFA blocked the White House's idea for home-energy improvement when it told firms not to participate, a href="http://www.washingtonpost.com/politics/edward-j-demarco/gIQAK9StKP_topic.html" target="_hplink"emThe Washington Post/em reports./a President Obama attempted to replace DeMarco with North Carolina banking commissioner Joseph Smith in 2010, only to be rebuffed by Senate Republicans who refused to confirm Smith, leaving DeMarco in place.a href="http://www.huffingtonpost.com/peter-s-goodman/ed-demarco-fannie-freddie-principal-reduction_b_1336190.html" target="_hplink"http://www.huffingtonpost.com/peter-s-goodman/ed-demarco-fannie-freddie-principal-reduction_b_1336190.html/a" target="_hplink"> leaving DeMarco in place.</a>
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