Ed DeMarco was a conscientious bureaucrat who was forced out of his position for doing a good job protecting the US taxpayer from looting politicians.

The list of evil0doers and nefarious characters of the housing bubble includes famous names like Anthony Mozilo, David J. Stern, and not-so-famous names like David Sparks, Michael T. Pines, Brent Arthur Wilson, Blair Christopher Hanloh, Robin and Chris Duncan, and many others. We had incompetence at many levels including famous names like Alan Greenspan and Robert Rubin, and millions of ordinary fools who bought the can’t-lose investment opportunity of the 00s, the housing bubble, and got burned.

While the deeds of the criminals and fools is titillating and instructive, it’s worth looking at the few really solid and upstanding individuals who did the right thing in the face of opposition and the temptation to go down the easier road. The one person who stands out the most in my opinion is former director of the FHFA, Ed DeMarco.

Back in 2008 and 2009 the political left was lobbying to give free money to loanowners by pressuring the GSEs to reduce principal balances. Ed DeMarco flatly refused to cave in to this pressure because he knew it would do nothing to help the GSEs, it would increase taxpayer losses, and it was morally repugnant to give money to people who foolishly overborrowed, particularly Ponzis living on cash-out refinances. When he said no, he immediately became a hero in my eyes.

The Man Who Took on Fannie Mae

How a career bureaucrat became the target of the housing lobby and the White House for trying to avoid a repeat of 2008.

By Mary Kissel, July 11, 2014 7:05 p.m. ET

He was a career bureaucrat who fought to protect American taxpayers, battled to reform potentially disastrous policies, and championed fiscal responsibility. Edward DeMarco was the loneliest man in government. …

Anyone outside of Washington might think he deserved a medal, but that’s not what happened. Instead, Mr. DeMarco was pilloried by members of Congress and excoriated by President Obama’s liberal allies. Former White House adviser Van Jones told the Huffington Post in 2012 that “you could have the biggest stimulus program in America by getting rid of one person”—Mr. DeMarco.

He did deserve a medal. He embodied everything taxpayers could want in a career bureaucrat, and rather than lionize him, he was forced out of government service. Shameful.

The White House didn’t press him to degrade lending standards, he says, but plenty of pressure did come from the administration’s proxies, including Realtors, home builders, the Mortgage Bankers Association, insured depositories and credit unions. Protesters organized by progressive groups showed up more than once outside Mr. DeMarco’s house in Silver Spring, Md., demanding his ouster. A demonstration in April last year brought out 500 picketers with “Dump DeMarco” signs and 15-foot puppets fashioned to look like him.

“My first reaction was of course one of safety,” Mr. DeMarco says of the April protest. “When I first saw them, I was standing a few feet from the window of a ground-level family room and they’re less than 10 feet way through this pane of glass, and it was a crowd of people so big I couldn’t tell how many people were out there. And then all the chanting and yelling started.”

His wife had gone to pick up their youngest daughter, one of their four children, at a friend’s house, “so I had to get on the phone and tell her, ‘Don’t come.’ ” Then he called the police, who eventually cleared the scene. “It was unsettling,” he says. “I think it was meant to be unsettling.”

Something the NAr is proud of, I imagine….

What did the protesters want, other than his resignation? “They wanted me to start forgiving debt on mortgages.” Ah, yes, the goal of housing advocates in and out of government ever since the fiscal crisis spurred by too many people borrowing too much money to buy houses they couldn’t afford: the multibillion-dollar do-over. Mr. DeMarco’s resistance made him unpopular in an administration that was anxious to refire the housing market.

This will be remembered as Ed DeMarco’s defining issue — and his finest hour.

The 54-year-old chooses his words carefully as he recalls his FHFA tenure, but his frustration is evident, particularly in light of recent events. His replacement at the agency, Mel Watt, announced in May that government will remain firmly in control of the mortgage market. Which means that Fannie and Freddie will be unleashed to embark on another affordable-housing push. Or, as Mr. Watt put it, they will maintain the government’s housing “footprint.” …

Treasury Secretary Timothy Geithner asked Mr. DeMarco to run the Federal Housing Finance Agency, the new entity that Congress mandated to run Fannie and Freddie until the politicians could decide what to do with the toxic twins. It was a natural transition, given that Mr. DeMarco had worked closely with the agency’s departing director, James Lockhart. He took over as acting director in August 2009.Mr. DeMarco started by scrambling to retain senior managers, who were fleeing Fannie and Freddie in droves. He gave them big salary hikes on Christmas Eve, creating “a tremendous amount of congressional outrage about compensation,” he says, with a wry smile. Even Texas Republican Jeb Hensarling, a reform advocate, dubbed the move “unconscionable.” Mr. DeMarco stuck to his guns.

A man of courage and conviction is hard to find in Washington.

In 2012, he rolled out an extensive “strategic plan” for the two companies, mischievously subtitled “The Next Chapter in a Story that Needs an Ending,” that promised “to gradually shift” risk from taxpayers to private insurers. FHFA announced plans to raise the federal insurers’ guarantee fees, shrink their mortgage portfolios, and reduce their loan limits so private insurance competitors could re-enter the market.

(See: DeMarco prepares for final shutdown of GSEs)

“I wasn’t trying to price Fannie and Freddie out of the market so much as get the price closer so that the taxpayer capital is getting an appropriate rate of return and that, more important, we start selling off this risk,” he says….

Isn’t that what we want in an administrator in his position?

What really earned the enmity of Democrats was his refusal to write down principal for “underwater” borrowers whose homes were worth less than their mortgages, and his opposition to a housing slush fund (“a housing trust fund,” he says, teasingly correcting me). Some 80% of those underwater homeowners were still making regular, monthly payments. “To create an incentive for them to declare a hardship to get that principal written down was a huge risk to the taxpayer,” he says. “And the longer-term implication of doing this is that it would have raised some serious questions about what a future investor could expect about how a mortgage contract was going to work.”

In other words, principal reduction was moral hazard on steroids.

Mr. DeMarco isn’t against government support for housing—if done properly. “Is providing leverage or loosening the underwriting standards to provide credit to households with little down payments and poor track records of managing credit really helping that family,” he says, “or is it setting that family up for increased risk of failure?” That’s not a question that wins friends in Washington.

The drumbeat for Mr. DeMarco’s ouster culminated in the Senate confirmation of Mr. Watt, a North Carolina congressmen whom Senate Majority Leader Harry Reid pushed through after killing the filibuster. (Mr. DeMarco hasn’t taken a job since leaving the FHFA: “I’m going to take a little time away to recover and to gain some fresh perspective.”)

Housing advocates cheered. One of Mr. Watt’s first acts was to announce that he would delay a series of planned loan guarantee-fee increases. In May he said he’d leave the loan limits for Fannie and Freddie guarantees at $625,500, which allow the twins to put taxpayer money behind McMansions. Mr. Watt’s FHFA has also tasked Fannie and Freddie with finding “underserved, creditworthy borrowers”—in other words, government will again be recruiting borrowers for mortgages they may not be able to afford.

(See: Mel Watt poised to reflate the housing bubble)

Mr. DeMarco is skeptical of such an approach, though he’s polite when he speaks about his successor. Assuming that only government can foster homeownership among people “below median income,” he says, “suggests a troubling view of markets themselves.”

He notes that homeownership rates in the U.S. today are the same as they were 50 years ago, despite all the government efforts to promote affordable housing. “Let’s say it was a failed effort,” he says. “To me, if you go through a 50-year period, and you do all these things to promote housing, and the homeownership rate is still bouncing around a two-percentage-point band, I think the market’s telling you we’re at an equilibrium.”

(See: Titanic failure of American housing policy, home ownership rate hits 18-year low)

Yet here we go again. “At some point, we’re going to have another serious problem,” he says. “I never would have thought that the last problem wasn’t serious enough to drive lawmakers to say we’ve got to fix this once and for all, no matter how hard it is.”

In my opinion, Dodd-Frank was good law; the ability-to-repay rules will prevent reckless lending, and the new mortgage regulations should prevent future housing bubbles, but we’ve done nothing to wind down the GSEs, and the too-big-too-fail banks are even larger, so there is still work to do.

It’s unfortunate Ed DeMarco won’t be guiding this effort. He is a rare good bureaucrat in an environment where such good work isn’t rewarded.

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