Why Barack Obama didn’t get rid of Edward DeMarco when the guy went rogue remains a bit of a puzzle. The acting director of the agency that oversees Fannie Mae and Freddie Mac is a Bush administration hold-over who got the job when Bush’s actual director resigned.
Under DeMarco’s tenure as temporary head of the Federal Housing Finance Administration (FHFA), he has stubbornly defied Obama administration policy requiring banks to negotiate loan modifications with families facing foreclosure on their underwater mortgages. DeMarco has refused to let Fannie Mae and Freddie Mac, both government-supported, cut original mortgage amounts to reduce monthly payments.
DeMarco ignored pressure, including a letter from Treasury Secretary Timothy Geithner and questioning from members of Congress who include the committees that oversee FHFA, to let Fannie Mae and Freddie Mac use principal reduction to help families keep their homes.
DeMarco’s own agency found that Housing Affordable Modification Program principal reduction alone could help some 500,000 homeowners and save Fannie Mae and Freddie Mac about $3.6 billion over standard loan modifications.
But DeMarco refused. And in September, he published a 31-page, four-year strategic plan for the Federal Housing Finance Administration.
In refusing to let the two entities use principal reduction, DeMarco in effect put banks before people. His strategic plan aims to make Fannie Mae and Freddie Mac financially healthy, preserve their assets, and protect investors in those assets.
Their assets basically consist of mostly bundled mortgages they buy from the banks that write them and from the bigger banks that bundle them. In exchange, they issue mortgage-backed securities (MBSs) to pay holders the payments and interest from the mortgages. Fannie Mae and Freddie Mac pay the banks to service the loans that back the MBSs. Banks and investors also trade MBSs.
Because Fannie Mae and Freddie Mac charge the banks small guarantee fees, they may have to buy back defaulted loans at full value. So the banks that brought down the economy have no incentive to negotiate agreements that let homeowners pay less and stay in their homes.
The banks fare better if they foreclose mortgages, get all their money back, and leave houses empty. Homeowners who were trying to get banks to renegotiate their loans have suddenly found themselves dealing with Fannie Mae instead.
President Obama can get rid of DeMarco, but not by firing him outright. Since DeMarco is just an acting agency director, Obama can replace him with a permanent director. The appointment requires Senate confirmation, and in party-line decisions, the Democrats have too small a margin to ensure it would go through.
There’s another way: a recess appointment. Obama has used this tactic before. It’s time to force him to use it again to dump DeMarco.
11/17/2002: Corrected to show 500,000 homeowners instead of 500 million homeowners in fourth paragraph.