Close your eyes and imagine:
The year is 2027. President Peace N. Love lost his re-election bid three years ago, after the disaster created by his military and intelligence cuts turned millions of Americans into homeless refugees.
His successor quickly appointed General Cathy Common-Sense (USMC, Ret.) to be Secretary of Defense. but Congress is controlled by President Love's party and refused to confirm her. So President Love's appointee, Sunshine Harmony Rainbow III, is still in charge at the Pentagon.
Defense Secretary Rainbow has halted all attempts to defend the homeland. "We're saving billions of dollars for the taxpayer instead," Secretary Rainbow tells Congress, "thanks to our secret plan. Maybe," the Secretary adds helpfully, "maybe we can spend the money learning to love one another." Soon it's discovered that Secretary Rainbow has misled Congress and the "plan" is really costing billions.
How do you think conservatives would react? How would voters react to a public servant like Sunshine Harmony Rainbow III?
It's 2012. Irresponsible banking actions devastated the economy, driving millions out of their homes and leaving Americans with three-quarters of a trillion dollars owed to bailed-out banks for nonexistent property values.
Fannie and Freddie followed Wall Street's crazy behavior, rather than leading it. But that, plus the irresponsibility and greed of their "privatized" executives, made it necessary for taxpayers to bail them out and take management control away from the failed private sector.
The housing crisis wasn't an act of God or an accident of fate. It was caused by radical conservatism and compliant "centrism" that pushed deregulation - the economic equivalent of demilitarization - and stripped oversight agencies of their power. Deregulation is an impractical fantasy, which is why voters rejected it in 2008.
So why are the radical ideologues of this failed philosophy still controlling our fate?
FHFA: The Mortgage Pentagon
One agency, the Federal Housing Finance Agency (FHFA), has the power to dramatically change the situation. It controls Fannie Mae and Freddie Mac, which taxpayers repurchased and bailed out after they were destroyed by "privatized" mismanagement and Wall Street greed.
Fannie and Freddie are behind more than half of the mortgages in the country. If the FHFA directed them to do so they could issue principal reductions, negotiate lower interest rates, push refinancing deals through the system, and dramatically reduce foreclosures.That would do far more than last week's settlement deal can ever hope to accomplish - without Congressional approval, with a stroke of its executive's pen.
But Congress has refused to appoint President Obama's nominee, Joseph Smith. Smith, as you might imagine from previous Obama appointments, is a centrist choice who should have been entirely non-controversial. He's a highly qualified and competent choice who has worked for banks as an attorney, as well as having served as a regulator.
Smith isn't an ideologue - but Edward De Marco and his senior managers are. DeMarco's the Acting Director of the FHFA. He's still in charge because, three years after he was elected, Obama has been unable to get his choice approved.
Like "Defense Secretary Rainbow" in our little story, De Marco refuses to carry out his agency's assignment for ideological reasons. The Defense Department's mission is to protect the American people from attack, and the FHFA's mission is to protect American homeowners - and in so doing, help the economy as well.
But instead of making it easier for homeowners to get relief, De Marco and his lieutenants are making it harder. Outrageously, they're even paying a financial manipulator millions in taxpayer money to bet billions against the same homeowners.They're betting that these homeowners can't refinance, while at the same time making it harder for them to do it..
The more these homeowners lose out, the more money the financial guy makes.
Wait. It gets worse.
Nothing For Money
As a letter from Reps. Elijah Cummings and John Tierney reveals, a former FHFA employee testified that there was a pilot program in principal reduction but it "was terminated by senior officials at Fannie Mae who were 'philosophically opposed' to the concept of reducing principal."
If so, then these DeMarco appointees are also "philosophically opposed" to the mission of their own institution.
DeMarco didn't reveal the existence of this program or its termination in his Congressional testimony. He also misled Congress and the public when he said that principal forgiveness for all (underwater) mortgages would cost "almost $100 billion," since $100 billion is the estimated total of all underwater principal, not just the amount that would be reduced for distressed homeowners.
Another FHFA study showed that not reducing principal on these mortgages would cost more than $100 billion, as Cummings and Tierney noted, while yet another showed that a well-designed principal reduction program would actually save taxpayers $28 billion.
DeMarco didn't mention those studies, either.
Who Is Edward DeMarco?
DeMarco's a career bureaucrat who joined FHFA under George W. Bush and was named Acting Director by Obama in 2009. The FHFA is an independent agency, so both the White House and DeMarco claim that he can't be fired. But DeMarco is still obligated to carry out his agency's mission - and to speak truthfully to his ultimate employers, the American people. (He has refused to speak with reporters or respond to press inquiries on a number of occasions.)
DeMarco defends his unwillingness to carry out his duties by claiming that principal reductions for underwater homeowners - some of whom are still paying seven percent interest or more for nonexistent home value, when the prevailing rate is as much as three points lower - "would not meet (the FHFA's) responsibilities as conservator of Fannie and Freddie." He told Congress that "FHFA has a statutory responsibility to preserve and conserve the enterprises’ assets."
What agency on Earth has a greater responsibility to not spend money serving its purpose than it does to do its job? It seems absurd, doesn't it? DeMarco's suggesting that not doing anything is a greater obligation for his agency than carrying out the function for which it was created.
Reverse Mission Creep
When he talks about "statutory responsibility," DeMarco is presumably referring to a provision of the Housing and Recovery Act of 2008 establishing the FHFA, which says that "in exercising any right, power, privilege, or authority as conservator or receiver ... the Agency shall conduct its operations in a manner which ... maximizes the net present value return from the sale or disposition of such assets."
But this is only one provision in a massive bill, one which reads like it was designed to address conservatorship for private-sector Federal home loan banks. Fannie and Freddie have an overarching objective which those banks don't have, which were the purpose for which they were created. That purpose is not to maximize asset value but to serve the public interest by helping homeowners.
Even James Lockhart, his Bush-appointed predecessor at the OHFEO (which became the FHFA), agrees with the assessment of Administration-friendly critics like Larry Summers that DeMarco is interpreting his mandate too narrowly.
What is the real purpose behind Freddie Mac and the FHFA?
Freddie's mission, clearly stated on its website, is "to stabilize the nation's residential mortgage markets and expand opportunities for homeownership and affordable rental housing ... (and) provide liquidity, stability and affordability to the U.S. housing market." The website lists Freddie's three key functions as follows:
- Meet the needs of the mortgage market by making homeownership and rental housing more affordable
- Reduce the number of foreclosures
- Helping families keep their homes
The FHFA's mission in overseeing Fannie, Freddie, and the Federal home loan banks is laid out on its website, too. "to promote their safety and soundness, support housing finance and affordable housing, and support a stable and liquid mortgage market."
The phrase "saving the taxpayer money" cannot be found on either the Freddie Mac or FHFA website.
But it's much too generous to say that DeMarco has interpreted his mandate "too narrowly." Even by that artificially constricted standard, DeMarco's refusal to permit principal reductions is an abrogation of his responsibility that's likely to cost taxpayers tens of billions of dollars.
Why? Why would an anti-spending bureaucrat insist on making such a costly decision? Perhaps DeMarco and his colleagues, like too many misguided Washingtonians, thinks that helping underwater homeowners would "reward the undeserving."
Few of their peers had the same compunctions toward Wall Street billionaires, of course, and there's ample evidence that these homeowners were deceived - by a bank-driven bubble, by mortgage brokers who misled them while banks "looked the other way," by deceptive appraisers who inflated their home's value, and by the widespread bank-fueled myth that "real estate values will always go up."
Even if you accept the wacky notion that an agency's highest obligation is to avoid executing its own function, however, DeMarco's rationale still doesn't wash. If DeMarco really believes that "asset management" and expense reduction is his prime responsibility, banks negotiate principal reductions all the time - for corporations. A sound fiscal manager would do the same thing here.
Besides, if DeMarco's prime responsibility is fiduciary, then he shouldn't let his moral judgments - sound or otherwise - interfere with the execution of his responsibility.
DeMarco also seems to be in an unseemly hurry to re-privatize Fannie and Freddie, despite the disastrous results the last time around. Consider former Fannie Mae CEO Daniel Mudd: An investigation concluded that he fostered an "arrogant and unethical corporate culture, where Fannie Mae employees manipulated accounting and earnings to trigger bonuses for senior executives."
Based on his actions, DeMarco apparently thinks those were the good old days.
What other explanation is there? DeMarco's appointees are hurting their organizations - and the taxpayer - because they are "philosophically opposed" to carrying out their own mission statements.
It appears that the housing agency - and therefore the entire real estate market, and our whole economy - is in the grip of a conservative "Secretary Rainbow," an anti-government ideologue who would rather subvert his agency's mission in pursuit of a small-government agenda.
America's underwater homeowners, and its economy, are being held hostage to Edward DeMarco's ideology.
The actions of DeMarco and his appointees aren't just wrong. They're a subversion of their own duties.
Edward DeMarco has failed to carry out his responsibility as head of the FHFA. Intentionally or not, he has also misled Congress and the public, withheld vital information, and failed to answer questions from the press or the people's representatives in a timely fashion.
As Reps. Cummings and Tierney wrote:
" ... (N)ew information ... calls into serious question the accuracy and completeness of your response, as well as your motivation for continuing to oppose principal reduction programs even when they have the potential to save American taxpayers billions of dollars."
Those are serious charges. But then, not performing your duty is pretty serious too.
Given his aversion to candor, we can only speculate about Mr. DeMarco's motivation. But both public testimony and his actions themselves suggest that he holds fairly radical right-wing views that are well outside the mainstream. That's certainly his right, just as it's every American's right to believe that military action is morally wrong.
But a pacifist would be a poor choice for Defense Secretary, and an apparent anti-government ideologue is a poor choice to lead the FHFA - especially when that ideologue appears to play fast and loose with the facts.
All of which raises the question: Why is Edward DeMarco still in this important post? We need leaders to solve our housing problem. Instead, this responsibility has been left in the hands of an ideologue whose deregulatory dreamworld is made up of nothing but rainbows.