Massachusetts Attorney General Martha Coakley has run out of patience with the nation's top housing official.
On Monday, after more than a year spent arguing that Fannie Mae and Freddie Mac should permit mortgage principal balance reductions in some instances, Coakley joined with other influential state attorneys general, including New York's Eric Schneiderman, in a letter calling for the ouster of Federal Housing Finance Agency acting director Ed DeMarco. In an interview with The Huffington Post, Coakley said DeMarco "was missing a huge opportunity" to help struggling borrowers with his "obstinate resistance to make a change that would help stabilize the economy."
"It is inexplicable to see a federal agency set up to help borrowers doing the opposite," she said.
The call for DeMarco's replacement comes as news reports indicate that Rep. Mel Watt (D-N.C.) could be named to head the FHFA as early as April. Watt, as the Wall Street Journal notes, is one of a handful of lawmakers on the House finance committee who voted against a popular measure that would have cut Fannie and Freddie executive salaries, saying it could push qualified talent to other firms. Watt also has supported increased access to housing finance for minorities and low-income borrowers, according to the Journal.
It is unusual for state law enforcement officials to engage in debate about who should run a federal agency, but little has happened at the Federal Housing Finance Agency in its 5-year history that could be characterized as normal.
The agency, set up to oversee Fannie Mae and Freddie Mac in 2008 in the wake of their massive taxpayer bailout -- which eventually cost $180 billion -- has never had a permanent director. As acting director for more than three years, DeMarco has had tremendous sway over the U.S. housing market, setting policy that has redirected Fannie and Freddie away from their mission to help low- and middle-income borrowers secure home financing, and aggressively pursuing legal action against the Wall Street banks that saddled the companies with bad loans in the run-up to the crisis. But his steadfast refusal to permit Fannie and Freddie from lowering the owed principal balance of any of the loans they control has earned DeMarco the enmity of housing activists, lawmakers and the state attorneys general.
Economists have blamed the housing crash for holding back a broader recovery from the financial crisis. Though home prices are finally moving up again, the online real-estate company Zillow estimates that 13.8 million borrowers owed more than their homes were worth at the end of last year. As HuffPost has reported, many of these borrowers are concentrated in neighborhoods in California, Florida and other states hard-hit by the crisis and are deeply underwater. Forgiving some of these homeowners' outstanding debt is the only way to stave off foreclosure in many instances, housing experts say.
In the past year, protesters have marshalled in front of DeMarco's suburban Maryland home in an attempt to deliver a "pink slip," and 45 Congressional Democrats have implored President Barack Obama to fire him. Even former Treasury Secretary Timothy Geithner, who also has mostly opposed principal reduction, sent DeMarco a snippy letter after the FHFA issued a report with findings at odds with its director's claim that principal reductions would hurt taxpayers.
Through it all, DeMarco -- a Republican whom former colleagues describe as an able administrator, albeit one with a strong ideological opposition to "bailing out" homeowners -- has withstood the pressure. Indeed, he has mostly avoided talking about principal reduction altogether since last summer, though he will likely be forced to explain his position again on Tuesday, when he testifies before the House Committee on Financial Services.
Though DeMarco has consistently refused to field interview requests from The Huffington Post, he has explained in the past that his actions are consistent with his mission as steward of taxpayers' investment in Fannie Mae and Freddie Mac. In response to the FHFA report that showed a targeted principal-reduction plan could help 500,000 homeowners and save taxpayers as much as $1 billion, DeMarco shifted his response, arguing that such an approach would pose a "moral hazard," spurring other homeowners to intentionally default in order to cash in.
This argument has not endeared DeMarco to homeowner advocates, who say it is bogus. "The banks are already offering principal reduction," said Janice Bowdler, the director of economic policy at the National Council of La Raza. "Extending that practice to Fannie and Freddie will open up relief to significantly more homeowners."
Should DeMarco be replaced, the next director of the FHFA will also have tremendous influence over the future of Fannie and Freddie, which are now stuck in regulatory purgatory. The FHFA and the Obama administration have both floated plans to wind down the mortgage giants, but with the housing recovery so tentative, Congress has mostly avoided the issue, fearful of pledging either to recommit to the ailing companies or risk spooking the secondary housing market that they now almost completely control.
Julia Gordon, the director of housing finance at the Center for American Progress, said that with Congress on the sidelines, DeMarco has had free reign to shape policy. "In the absence of congressional action on reform, FHFA is using its extremely broad powers under the conservatorship to design the mortgage finance system of the future," she said.
Principal reduction first gained national attention last February, when as part of a 49-state foreclosure settlement, five large banks pledged to write off $10 billion in outstanding principal. Though fewer than 50,000 borrowers had received a principal reduction as part of a loan modification under the program as of the end of 2012, state officials say that enough evidence has accrued to prove that loan write-downs work, and that they do not lead to a run of intentional defaults, as opponents like DeMarco claim.
Since then, the state attorneys general who negotiated the deal have repeatedly criticized DeMarco for refusing to allow the five banks involved -- Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial -- to write down any loan owned or controlled by Fannie Mae or Freddie Mac.
Monday's letter, signed by nine attorneys general, frames the debate over DeMarco in economic terms. "By refusing to allow for principal write-downs that would result in more loan modifications, FHFA stands as a direct impediment to our economic recovery," the letter asserts.
Coakley, the Massachusetts attorney general, said that a full housing recovery in her state depends on the federal government using all the tools at its disposal to help families who can afford to do so stay in their homes. DeMarco, she said, has to go.
"We hope that the president will take it seriously that we need a change in leadership," she said.