Dec122012

Head of GSEs Edward DeMarco faced replacement, unfortunately

Edward DeMarco is a thorn in the side of the Obama administration. He has consistently resisted calls to pander to loanowners by forgiving principal on GSE loans. Many on the political left are calling for his head, and the Obama administration is poised to oblige them — and that’s not appropriate.

DeMarco has proven to be a thoughtful administrator who protects the interests of the US taxpayer. Of course, that’s the problem many politicians have with him. They want to raid the coffers of the treasure to buy more votes. If DeMarco is replaced by someone who will allow politicians to steal from the treasury to buy votes, it would be a travesty. Unfortunately, I am not hopeful that Conservatives have the will or the power to stop them. This is one more step toward becoming a banana republic.

White House Seeking New Regulator for Fannie, Freddie

December 10, 2012, 11:52 AM

The White House has begun preparations to nominate a new director to lead the agency that oversees Fannie Mae and Freddie Mac as soon as early next year, according to people familiar with the discussions. This would pave the way for President Barack Obama to fill what has become one of the most important economic policy positions in Washington. …

The FHFA’s current director, Edward DeMarco, took the job more than three years ago in an “acting,” or interim, capacity. He has remained in the position after the Obama administration’s first nominee for the job, Joseph Smith Jr., then the North Carolina banking commissioner, withdrew from consideration in January 2011 amid opposition from Senate Republicans. The FHFA, created 4½ years ago, has never had its own director confirmed by the Senate.

There is no reason to believe the Republicans will be any more accommodating this time around. The Left wants to appoint someone who will give loanowners free money. Conservatives are repulsed by the moral hazard and cost of such a program.

While some liberal political groups have pushed for a quick recess appointment that bypasses the need for Senate confirmation, such a move appears highly unlikely for now. …

A recess appointment would be unlikely before a nominee has had a full Senate hearing because it would risk poisoning relations with Senate Republicans during negotiations over the “fiscal cliff” and ahead of confirmation hearings for other high-level positions such as Treasury secretary, secretary of state, and chairman of the Securities and Exchange Commission.

It’s also possible an appointment of a left-wing free-money panderer will be part of the fiscal cliff compromise.

Mr. DeMarco has become a lightning rod for criticism over the shortcomings of federal housing policy and has at times thwarted White House initiatives, including an effort to launch a targeted principal-reduction program earlier this year. Liberal political activists have called on the president to fire him (which isn’t easy to do). …

On the other hand, mortgage traders, congressional Republicans, and some industry executives have lauded Mr. DeMarco as a principled adherent to the law and steward of taxpayer dollars. Mr. DeMarco received a warm reaction from attendees at a conference hosted last week by the Securities Industry and Financial Markets Association in New York, where several panelists said they hoped Mr. DeMarco would not be replaced. …

Edward DeMarco should not be replaced. He has diligently and competently protected the taxpayer will reducing the size of the GSEs over the last three years. He has earned a reappointment to his position.

What Role Will the Government Play in a Reformed Housing Market?

Dec 6 2012, 2:50PM

Edward J. DeMarco, Acting Director of the Federal Housing Finance Agency, told members of SIFMA this afternoon that “The secondary mortgage market infrastructure that served this country for many years is broken.”  It is not effective when it comes to adapting to market changes, issuing securities that attract private capital, aggregating data, or lowering barriers to market entry he said.  There must be some updating and continued maintenance of the government sponsored enterprises securitization infrastructure, “and to the extent possible, we should invest taxpayers’ dollars to this end once, not twice.” …

DeMarco clearly understand the issues facing the GSEs, and so far, he has resisted all political pressure to open their coffers to politicians who want to buy votes.

The conservatorships of Fannie Mae and Freddie Mac were never intended to be long-term solutions.  They were meant as a “time-out” as the market was eroding and a way to provide some stability while decisions were made about rebuilding the housing finance system.  Today the government is involved in nine out of every ten mortgages so it is essential that the mortgage market transition to a more secure, sustainable, and competitive market.

Unfortunately, despite their “intended” use as a temporary market safety net, the housing market is so dependant upon these entities that it will be very hard to unwind them without causing the so-called recovery to collapse.

DeMarco said … “In the mortgage market, that means we need established rules by which everyone abides. But we also need competitive markets and market participants operating within those rules to ensure that credit is available to help families purchase homes and rent houses and apartments.  A competitive private market system also ensures that such capital is efficiently allocated between housing and all other sectors.”

A competitive market? With the government currently backing about 95% of loan originations, we are a long, long way from a competitive market.

FHFA recently issued a white paper in which the development of a new infrastructure was divided into two components; the “physical” infrastructure or platform which comprises the technology that drives the existing secondary market operations and the “virtual” infrastructure, meaning the contractual provisions that govern secondary market transactions. …

While the GSE’s are working toward harmonizing requirements in their respective Seller and Servicing Guides, this is an optimal time to further consider how best to address contractual shortcomings identified during the past few years.Some of the work already underway which will fit into the various parts of a new infrastructure for housing finance are:

  • The Uniform Mortgage Data Program is improving the consistency, quality and uniformity of data gathered at origination and for servicing. Common data definitions, electronic data capture, and standardized data protocols will improve efficiency, lower costs, and enhance risk monitoring.
  • Settling on servicing standards will provide clarity on how troubled loans will be serviced and FHFA’s Servicing Alignment Initiation produced a single set of protocols for both GSEs which may serve as a basis for national servicing standards.
  • FHFA’s Joint Servicing Compensation Initiation is considering alternatives for future mortgage servicing compensation.
  • The Representation and Warranties framework long used by the GSEs did not work well under stress conditions so the GSEs have developed a new framework that will clarify lenders repurchase exposure and liability on deliveries after January 1.
  • The Loan-Level Disclosures announced last year will help establish consistency and quality of data for investors in Enterprise MBS.

Those are all good initiatives. It’s somewhat surprising many of these initiatives were not in place before.

DeMarco said that there is no simple path to rebuilding the country’s housing finance system and there are still many fundamental questions about the end state of housing finance reform.  There are also difficult transition issues to consider and FHFA is working to help pave that transition to whatever end state policymakers ultimately choose.

One step is to contract the GSE operations.  To that end, FHFA is increasing guarantee fees and pursuing initiatives with the potential to transfer some credit risk to the private sector, a goal that most policymakers seem to agree with. While FHFA will continue to work in this area, if policymakers are serious about limiting the government’s role, more direct action may be needed to have significant near-term effects.

This is what’s already happening with the FHA. Each time the FHA raises it’s fees to ward off insolvency, they increase the cost of borrowing so much that it creates opportunity for private lending. Right now, lenders could offer second mortgages at 12% interest rates and undercut the cost structure of FHA loans. As costs move high, so do the potential returns for private capital. Eventually, lenders will start making these loans again. If the GSEs continue to raise their fees, they will create the same set of circumstances.

The most fundamental question in considering the end game for housing finance reform is what, and how big, should the role of the federal government be?  This, DeMarco said, is clearly where there are diverging policy and political views, but stakeholders must start to think through this process.  …

One potential place to start is what the role of the traditional government mortgage guarantee programs, like the Federal Housing Administration or FHA, should be.

We could start by lowering the conforming loan limit to reduce the overall footprint of the GSEs. This would create a void private lending could step into. Of course, that will also raise borrowing costs and potentially lower house prices as the market found a new equilibrium.

If FHA’s role in the future is defined in terms of which borrowers would have access to this program, then it should be easier to look at the rest of the market and consider questions like:

  • “What is the capability and capacity of private market participants to intermediate credit for single-family housing? What functions are necessary to have an efficient market?”
  • “How should standards be established and updated in the market to enhance efficiency, risk assessments, and liquidity, thereby lowering costs to borrowers and investors alike?”
  • “Where do we think the market system requires prudential government oversight or limits? Have we ensured that any oversight or limits act to foster, not inhibit, competition, including fostering the full participation of small and mid-sized firms in the mortgage market?”
  • “Are there remaining public policy concerns about potential market failures and, if so, are those concerns about market stability and liquidity or about social policy goals regarding homeownership?”

Politicians obsession with promoting home loanership will likely never end. Despite the evidence from other countries without government supported mortgage markets, politicians continue to believe home loanership is so desirable it’s worth any taxpayer cost.

The more I read about Edward DeMarco, the more I respect his sound judgement and good stewardship of the GSEs. It would be a shame to replace him with some political hack who will dole out taxpayer dollars so left-wing politicians can pander for votes.