Bill’s Place

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.

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An historical observation relating to this pressure from the left on federal housing policy:

 

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

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 . . . .

Don't forget the role of the rating agencies in the financial crisis. In the 1975 the U.S. Congress designated the Nationally Recognized Statistical Rating Organizations (NRSRO's). When Congress passed the legislation anointing the NRSRO’s it gave this limited number of organizations oligopoly status and unique competitive advantage. At the same time, Congress appointed the Securities and Exchange Commission as regulator of the NRSRO's. 

Most investment advisors and portfolio managers use rating agency guidelines (ratings) to assist their evaluation of the quality and risk associated with the securities they purchase* and fiduciaries are restricted by law as to the minimum rating level from which they can select the investments they can purchase and manage. So, the rating agencies provide a seal of approval, so to speak, for the securities and companies they rate.

* In most cases, the ratings securities an investment advisor, or a portfolio manager will use are defined in a prospectus, offering circular, or by some other form of disclosure. 

 Why is there a ‘shadow inventory’ of homes?

  

In last quarter of 2008, U.S. banks and their lobbyists pushed the U.S. Congress to force the Financial Accounting Standards Board (FASB) to postpone the implementation of mark-to-market accounting (FAS #157).* The FASB eventually acquiesced.  So, after the acquiescence, banks and other collateralized mortgage obligation [CMO] investors can continue to carry these investments at origination value, rather than at the investment’s current market value.

 

But, if a bank or other mortgage investor forecloses, renegotiates the mortgage, or sells the home (the collateral) the new ‘book value’ of the investment is based upon the new selling price (or mortgage value) - as determined by the terms of the new deal (auction, renegotiation, or sale).

 

By not foreclosing, renegotiating, or formally taking back properties (REO) banks and other mortgage investors can, to some extent, manage what  their losses appear to be, and hopefully offset the losses - they recognize - against other revenue, over time.

  

Key-words-search: “Congress Helped Banks Defang Key Rule” By Susan Pulliam & Tom McGinty WSJ 6/3/2009 | Professor Adam Levitin Congressional testimony “Federal Regulators Don’t Want to Know” YouTube | Zombie Banks | Japan Lost Decade (Please note that, at the beginning of Japan’s lost decade our current Treasury Secretary, Timothy Geithner was living and working in Japan as a Treasury Department attaché in the U.S. Embassy.)

 

*  See, FAS #157 [mark-to-market accounting] and scroll down to the section heading: Effect on subprime crisis and Emergency Economic Stabilization Act of 2008 , at http://en.wikipedia.org/wiki/Mark-to-market_accounting

 

Federal Regulators Don't Want To Know