Obama Faces Pressure From Left on Housing Regulator
Wall Street Journal - Developments February 7, 2013
By Alan Zibel
Rep. Elijah Cummings (D., Md.) is among lawmakers calling on
President Obama to nominate a permanent director for the FHFA.
When will the White House finally have something to say about President Barack Obama’s pick to run the FHFA?
That question is on the mind of 45 House Democrats. The lawmakers, led by Reps. Elijah Cummings (D., Md.) and John Tierney (D., Mass.), sent a letter on Thursday to President Barack Obama urging him to nominate a director of the Federal Housing Finance Agency–-the federal regulator for Fannie Mae and Freddie Mac.
“We believe your re-election is a prime opportunity to put forth a new candidate who is ready and willing to implement all of Congress’ directives to meet the critical challenges still facing our nation’s housing-finance markets,” the lawmakers wrote.
The agency’s acting director, Edward DeMarco, has been criticized by Democrats on Capitol Hill, administration officials and liberal groups, all of whom have been calling on Mr. Obama to replace Mr. DeMarco.
Representatives for the White House and Mr. DeMarco were not immediately available for comment.
Why all the fuss about a seemingly obscure regulator? The most prominent area of conflict has been the FHFA’s refusal to accept the Obama administration’s offer to subsidize the cost of debt forgiveness for troubled homeowners.
Obama administration officials argued that Fannie and Freddie could actually save money by doing so but Mr. DeMarco said no, arguing that any potential savings would not be large enough to overcome other costs.
As Developments reported in December, the White House has been exploring potential leaders for the agency.
But the matter does not appear to be especially urgent for the administration as it focuses on confirming leaders for cabinet-level agencies such as the Treasury Department.
Another issue is that it may be difficult to find a FHFA nominee who could clear the Senate, where Republicans are likely to be skeptical of any choice: The administration’s first choice to run the FHFA, former North Carolina banking regulator Joseph Smith, withdrew his name more than two years ago in the face of intense Republican opposition.
Many on the left would like Mr. Obama to use a recess appointment to install Mr. DeMarco’s replacement. But that outcome is now highly unlikely, now after a federal court ruled that Mr. Obama’s use of that method to install three members of a federal labor panel was unconstitutional.
An historical observation relating to this pressure from the left on federal housing policy:
On November 5th 2012 (the day before the election) President Obama spoke to a group in Columbus, Ohio.After hearing an excerpt from the speech I began to wonder if he actually believes what he said, or if he's just rearranging history to suit his goals. I hope you will watch the video at the following hyperlink to its end. I think I ask some relevant questions in the last minute, or so.Economics professors will tell you that one of the best ways to create jobs, and to stimulate an economy, is support home building. (Think of all the trades, products and services that are required to build and furnish a home.)But, I've never heard of any economics professor who advocated a long-term policy of providing loans to people who couldn't afford to repay the loans (However, I think some of what are called "Keynesian Economists" seem to favor such policies over as a short term prescription for economic stimulus.)I’ve come to believe that many of the policies embraced by President Bill Clinton produced great economic results during (and, for awhile after) his administration. But, as those policies and political pressures went to excess, they eventually led to the housing bubble and the financial crisis.It seems, the financial bubble that burst during the last year of George W. Bush's administration was a long time in the making.Just a thought . . . .
The change to mark-to-market accounting for certain classes of financial assets (GAAP) has been delayed by Financial Accounting Standards Board (FASB) - with pressure from the U.S. Congress and bank lobbyists (see: http://online.wsj.com/article/SB124396078596677535.html). So, the necessity to actually account for these bank assets' true market value is currently suspended.
If a mortgage owner is a bank and the bank forecloses, the process for re-pricing the asset begins. And, the amount of the loss on the asset would then reduce the calculated bank reserves and force the regulators to require the bank to add more reserves. Under present market conditions this would not be a good thing for the bank, or for the U.S. Government. (Under present conditions banks which could not raise more reserve assets would be forced into FDIC receivership). And, if banks actually began to foreclose rapidly on all borrowers-in-default the calls for Government Sponsored Agency (GSA) loan insurance payoffs would further complicate the bail-out of the GSA's. Also, the demand for private mortgage insurance payoffs would put further stress on private mortgage insurers and impose additional stress on the financial system in general (and probably require private insurers to increase their required reserves).
Another reason banks might avoid foreclosing on a borrower-in-default is that judges are becoming a bit cantankerous. Judges have begun to force loan modifications, mandate cram-downs, and in the absence of good physical documentation proving a bank or investor actually owns the loan, some judges have even awarded property to the (supposed) borrower when the loan documentation is missing, flawed or incomplete.
It seems that the rush to originate loans, slice-and-dice loan tranches, construct CMO derivatives, track ownership, and re-register frequently traded CMO's (in the electronic registration system) led some necessary loan details, and even some complete documentation, to "go missing". So banks and investors are beginning to see foreclosure as a risky and potentially expensive option. (see: 10/24/09 NYT article by Gretchen Morgensen titled, "If Lenders Say 'The Dog Ate Your Mortgage' " at> http://www.nytimes.com/2009/10/25/business/economy/25gret.html )
Another subtlety, as long as the bank allows the borrower-in-default to stay in the home the mortgage investor (bank or CMO investor) is not as greatly exposed to losses from theft, vandalism and gross depreciation of real estate value due to non-maintenance of the property.
Also, by not foreclosing on borrowers-in-default the lender avoids becoming the owner of the property and thus avoids direct liability for property taxes, HOA Fees, and some of the more recently imposed municipality assessments levied against investors who now own foreclosed property (see: http://www.dlapiper.com/miami-dade_foreclosure_ordinances/ for another example see mosquito abatement fees in some areas of California - Indio, Palm Springs, Stockton, Mountain House, etc.)
If the "shadow inventory" came to the market all at once demand would be even further overwhelmed by supply causing even more significant price erosion.
It’s logical . . . perhaps corrupt, but logical.
Other Resources:
1. See CoreLogic.com at: http://www.corelogic.com/search.aspx?q=shadow+inventory
2. The Case-Shiller S&P Home Price Index is published on the last Tuesday of the month with a two month time lag in reporting for data gathering and data analysis, at: http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en...
3. Also see, YouTube video The Impact of The Delay in Implementing FAS#157 at:
4. And, watch the YouTube video The Short Sale Conundrum - Mortgage Servicers’ Misaligned Incentives at:
5. Re: Was the strategy for delaying the pain learned during Japan's 'Lost Decade'? “Geithner worked for Kissinger Associates in Washington for three years and then joined the International Affairs division of the U.S. Treasury Department in 1988. He went on to serve as an attaché at the Embassy of the United States in Tokyo.” From Wikipedia, Timothy Geithner at: http://en.wikipedia.org/wiki/Timothy_Geithner
6. Watch a brief segment of Georgetown Law Professor Adam Levitin's Congressional testimony titled, "Regulators Don't Want to Know" at:
Burdened by Old Mortgages, Banks Are Slow to Lend Now By Nick Timiraos Wall Street Journal, pub. October 3, 2012
From the article:
Part of the problem lies in changes in mortgage processing over the past few decades. Fannie and Freddie rolled out automated-underwriting systems in the mid-1990s that allowed lenders to punch borrower data into computer systems in order to receive faster approvals or denials.The mortgage bust highlighted weaknesses. Fannie and Freddie did few upfront reviews of loans that they purchased; instead, they screened some of those that went bad, forcing banks to buy back any with obvious signs of negligence or fraud.After the meltdown, the mortgage giants began hiring armies of auditors—called "bounty hunters" by bank executives—to conduct detailed reviews of loan files to spot errors that could justify a put-back.deja vu
Many politicians, some federal regulators, and many vocal media commentators claim that the Community Reinvestment Act (CRA) and its regulatory evolution had nothing to do with the creation of the U.S. housing and mortgage bubble. It seems that, at some point in the near future, an objective review of the facts may require a revision of the claim that the CRA was not a significant factor in the creation of the U.S. housing and mortgage bubble.1
The Community Reinvestment Act: Its Evolution and New Challenges*
A speech by Chairman of the U.S. Federal Reserve, Ben S. Bernanke
At the Community Affairs Research Conference, Washington, D.C.
March 30, 2007
From the third paragraph below the heading: The Evolution of The CRA
Even as these developments were occurring, extensive change was taking place in the financial services sector. During the 1980s and 1990s, technological progress significantly improved data collection and information processing, which led to the development and widespread use of credit-scoring models and the availability of generic credit history scores. Deregulation also contributed to the changes in the marketplace. Notably, the lifting of prohibitions against interstate banking was followed by an increased pace of industry consolidation. Also, the preemption of usury laws on home loans created more scope for risk-based pricing of mortgages. Securitization of affordable housing loans expanded, as did the secondary market for those loans, in part reflecting a 1992 law that required the government-sponsored enterprises, Fannie Mae and Freddie Mac, to devote a percentage of their activities to meeting affordable housing goals (HUD, 2006). A generally strong economy and lower interest rates also helped improved access to credit by lower-income households.
* See the text of the complete speech at: http://www.federalreserve.gov/newsevents/speech/Bernanke20070330a.htm
Footnote:
1. To see reasoning which strongly opposes the view that the CRA was not an influence in the creation of the bubble,see: The Financial Crisis on Trial By Peter J. Wallison - WSJ OPINION pub. December 21, 2011 at: http://online.wsj.com/article_email/SB10001424052970204791104577108183677635076-lMyQjAxMTAyMDAwNDEwNDQyWj.html?mod=wsj_share_email
In November of 2011, at a business roundtable in Mid-town Manhattan a member of the press asked NYC Mayor Michael Bloomberg for his thoughts on the Occupy Wall Street Movement (OWS).
He said, “They are blaming the wrong people. Plain and simple, Congress caused the mortgage crisis, not Wall Street”.
Watch as Mayor Bloomberg makes his, Blame Congress Declaration