(NEW YORK) MintPress — As the race for the White House heats up, so too does the debate over how to best help homeowners who are facing foreclosure.
There is a battle looming between Democrats in Congress and the Federal Housing Finance Agency (FHFA), the federal organization in charge of regulating mortgage lenders Freddie Mac and Fannie Mae as well as the 12 Federal Home Loan Banks.
The FHFA, which was created in response to the financial crisis, was established under the Federal Housing Finance Regulatory Reform Act of 2008, which is part of the larger Housing and Economic Recovery Act of 2008 signed on July 30 of that year by President George W. Bush. Essentially, the law put the mortgage lenders under government conservatorship.
The move was described in The Washington Post as “one of the most sweeping government interventions in private financial markets in decades.”
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FHFA’s role
On the day of the law’s signing, James Lockhart, the former director of the Office of Federal Housing Enterprise Oversight (OFHEO), which had been in charge of regulating the mortgage lenders, stated:
“For more than two years as Director of OFHEO I have worked to help create FHFA so that this new GSE (government subsided enterprise) regulator has far greater authorities than its predecessors. As Director of FHFA, I commit that we will use these authorities to ensure that the housing GSEs provide stability and liquidity to the mortgage market, support affordable housing and operate safely and soundly.”
Lockhart’s successor, Acting Director Edward DeMarco, who was originally appointed Chief Operating Officer by President Bush, has interpreted FHFA’s mandate in a way that has infuriated the White House and Democratic lawmakers.
Since last year, they have been pushing DeMarco to embrace “principal write-downs,” which would effectively require lenders to create a new loan based on a home’s current value, rather than the value that formed the basis of the original loan.
More than 10 million homeowners are now underwater, meaning their properties are worth less than the mortgage amount owed. Principal write-downs would reflect that negative equity and allow homeowners to make lower monthly payments and avoid losing their homes. The trade off for the lenders is that they have to accept the lower asset value of the home.
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DeMarco vs. Democrats
DeMarco opposes principal write-downs and maintains that the FHFA does not have the authority to impose them on lenders. He maintains that extending the terms of mortgages is preferable to reducing principal because it would result in less loss to taxpayers, who now own 80% of Fannie and Freddie. So far, taxpayers have pumped about $183 billion into Fannie and Freddie to keep them afloat.
Larry Summers, a former top economic adviser to President Obama, spoke for the White House when he argued in a column last fall that DeMarco had “taken a narrow view of the public interest” in his interest to protect Fannie Mae and Freddie Mac’s assets.
“FHFA has not acted on its conservatorship mandate to insure that the GSEs act to stabilize the nation’s housing market, and taken no account of the reality that the narrow financial interest of the GSEs depends on a national housing recovery,” Summers wrote.
The Republicans in Congress have meanwhile refused to approve Obama’s nominee to replace DeMarco.
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Public outcry
Moveon.org, a nonprofit public advocacy group, has recently started a campaign to get the President to use the next congressional recess to appoint a replacement. “What would it take to save millions of homes and billions of dollars in taxpayer money? Replacing one man—Edward DeMarco,” it says on its website. “Sign this petition encouraging him (Obama) to take the bold step of replacing DeMarco with someone who’ll do the right thing for the economy and the 10 million families who are in danger of losing their homes.”
The last time Obama used his executive power to sidestep Congress was this year’s appointment of Richard Cordray, a former Ohio Attorney General and leading consumer advocate, to head the newly created Consumer Finance Protection Bureau (CFPB). Republican Congress members had refused to approve Cordray until there were changes in the bureau, which they say imposes unnecessary regulation. There was sharp criticism of the move by Republicans on Capitol Hill.
There doesn’t appear to be an easy solution to the growing controversy over the FHFA.
Source: MintPress