FHFA's DeMarco: Tough Talking the Banks

by: Bruce Krasting
The FHFA’s Acting Director, Edward DeMarco, gave a status report on the nation’s mortgage mess to the House Committee on Capital Markets. He addressed a number of key issues. There was a recital of the steps being taken to mitigate losses to the taxpayers. A sub set of that was a discussion of the status quo on the matter of the banks having to repurchase billions of loans from Fannie (OTCQB:FNMA) and Freddie (OTCQB:FMCC). These loans never met the Agency's guidelines and of course, went bust. This is an old news story. It has been widely reported that the banks were balking on their obligations to do the buybacks. DeMarco did not leave much wiggle room on this issue. Some cut and pastes from the testimony:

I have been clear that the Enterprises should actively enforce lender compliance with their contractual obligations, which includes pursuing repurchases from those institutions whose loans did not meet the Enterprises’ underwriting and eligibility guidelines...

As of the end of the second quarter 2010, Fannie Mae had $4.7 billion in outstanding repurchase requests, and Freddie Mac had $6.4 billion in outstanding repurchase requests...

More than one-third of these repurchase requests have been outstanding for more than 90 days...

Many of the lenders with aged, outstanding repurchase requests are among the largest financial institutions in the United States...

FHFA may look to its supervisory and conservatorship authorities provided under the statute to resolve the situation...

I love it when they talk tough like this. DeMarco is saying that he sitting on $11b of IOUs from the same banks who got the biggest chunks of the TARP money. He calls them “the largest in the US”. Okay, we know that list. Pikers.

DeMarco says this matter is under discussion. But he leaves little room for what the outcome will be. The banks will pay. Or he will sue them and they will pay.

$12 billion is nothing to these banks. If that were all there was to this there would not be any nasty Congressional testimony. They would have written the check(s) and said that they now had a clean book with D.C. Clearly that is not the case.

Based on his bio I guess that DeMarco is in his early 40’s. So no gray hair. Possibly that is the reason why he has not yet been appointed as the Director of the FHFA (vs acting). That’s too bad. My guess is if this guy had the title and the backing he could kick some butt. He’s the only one who has a vision of what housing finance in the US should be, and what role government support should play.

These big issues will be up for discussion in 2011. As of now the only plans have come from Barney Frank and the Mortgage Bankers Association. Barney does not really have a plan. But his primary objective will be to use credit as an elixir rather than a right. The Mortgage Bankers want to break Fannie and Freddie into small pieces. They want to own the stock of these pieces. They want the government to guarantee all of the debts of the new pieces. With these plans we would repeat both sins of the past. We need a better voice and a different plan. This is too important to screw up again.

Something else DeMarco said on the Hill that I thought was significant. This stuff doesn’t win votes. But the idea that someone is trying to save the taxpayer some bucks is welcome:

I am very supportive of the efforts to discourage borrowers who can otherwise make their mortgage payments from walking away from their obligations. So-called “strategic defaults” not only result in increased losses for taxpayers, but also have a deleterious effect on neighborhoods.