Menu

Former FHFA Head DeMarco Wants to Shift Blame for Problems He Helped Create

Former Federal Housing Finance Agency Director Ed DeMarco is trying to shift blame for growing perils posed by Fannie and Freddie’s state of limbo from his own actions while at the FHFA to someone – anyone – else.

In audio remarks obtained by American Banker, DeMarco indicated that Congress’ failure to pass housing finance reform legislation continues to pose a threat to the country, and policies under the Obama administration risk repeating mistakes that led to the 2008 financial crisis. But has he forgotten that the Third Amendment Sweep, which DeMarco helped engineer, drains Fannie Mae and Freddie Mac of all capital reserves and creates huge uncertainty about the future role of Fannie and Freddie? This is the bigger threat to taxpayers, shareholders and the housing marketplace.

In a recording from a private event last week and obtained by American Banker DeMarco said this:

“In the past year or so we’ve actually seen a renewed policy focus on questions regarding access to credit, which can risk repeating the approach that contributed to the financial crisis—that being the government’s rather vigorous concern about expanding access to credit. That’s not to blame the conservator, whoever it is, it is pointing out the consequence of having a lack of legislative action and having these two companies continuing to operate in conservatorship.”

Like a rogue bureaucrat, DeMarco acted outside of his legal authority in helping to create the Third Amendment Sweep, which was in opposition to the Housing and Economic Recovery Act of 2008. Now he seems to be trying to ignore the consequences of these actions and make sure someone else gets blamed if taxpayers are again burdened with a downturn in the housing market.

Congress’ intentions in HERA were clear: it created FHFA and named it conservator of the GSEs. Perhaps DeMarco didn’t like what Congress intended so he interpreted the law his own way. This isn’t the first time we’ve heard of DeMarco trying to justify his actions. Last fall at the Bipartisan Policy Center’s annual Housing Summit, we blogged this on DeMarco’s appearance:

We quoted him saying, “During my tenure, I believe that FHFA had a responsibility not just to operate the conservatorships according to the law, but to be attentive to the direction the administration and lawmakers were going.”

To that, we commented, “That’s an interesting “belief.” How does it square with what is stated within HERA about FHFA’s role, though?

FHFA powers as conservator, as outlined by HERA: is to “take such action as may be—(i) necessary to put the regulated entity in a sound and solvent condition; and (ii) appropriate to carry on the business of the regulated entity and preserve and conserve the assets and property of the regulated entity.” [12 USC § 4617(b)(2)(D).]

We know that DeMarco didn’t comply with the law’s mandate to “preserve and conserve the assets and property” of Fannie and Freddie but it still seems a little audacious for him to ignore the connection between the sweep and the current exposure of taxpayers.  It would be useful for DeMarco to read IU Executive Director Tim Pagliara’s op-ed that was recently published in a Capitol Hill newspaper. Pagliara wrote:

“Just last month, Fannie Mae’s Chief Executive Officer Tim Mayopoulos sounded the alarm over the undercapitalization of Fannie, saying, ‘The fact that we don’t have a significant amount of capital increases the likelihood that Fannie will need additional capital from Treasury at some point.’  Mayopoulos was also unsparing in his description of why the GSEs were undercapitalized, adding, ‘The GSE capital depletion is a direct outcome of the repayment terms embedded in the Preferred Stock Purchase Agreements (PSPAs) between the GSEs and the U.S. Treasury. That agreement requires the GSEs to remit 100 percent of profits, which precludes building capital.”

American Banker reached out to DeMarco for further comment on his remarks, but they got no response. Maybe DeMarco will expand on what he said during an appearance tomorrow (Tuesday, March 17) at Ferrum College in Roanoke, VA, where he is scheduled to speak on a panel addressing housing finance reform.

The forum, titled, “U.S. Housing Finance Reform: Can We Manage and Control Taxpayer Risk While Assuring Continued Innovation in the Market?,” presents another great opportunity for Virginia-based Investors Unite members to get together and respectfully raise awareness about the dangers posed by the Treasury’s continuation of the net worth sweep. It’s time to let the GSE’s recapitalize, and Dr. Clifford Rossi’s well-reasoned plan is a good place to start.

The conference will be held at the Hotel Roanoke and Conference Center from 9:00 am to 12:00 pm, and interested parties can register to attend on the forum’s website. The event will also be webcast and you can follow developments at our discussion board.