Federal regulator stands by his principles on principal reduction

WASHINGTON — A little-known career bureaucrat temporarily filling a key government job has emerged as the person with the most impact on the nation’s battered housing market — and is rapidly making enemies.

As the regulator over Fannie Mae and Freddie Mac, which own or back 60% of the nation’s mortgages, Edward J. DeMarco is considered by a growing number of people to be the single biggest obstacle to the housing market recovery for opposing the use of a major foreclosure prevention measure.

DeMarco, interim director of the Federal Housing Finance Agency, won’t instruct the government-owned companies to lower loan principals for distressed homeowners, as many banks nationwide have been doing.

Kamala D. Harris, attorney general for California, the nation’s largest distressed real estate market, and many congressional Democrats want DeMarco replaced. Some have been especially sharp in their criticism.

“Here’s some random idiot who ends up in charge of this agency, who is doing actual damage to the housing industry and my constituents,” said Rep. Zoe Lofgren (D-San Jose). “He is intransigent, incompetent and should be removed.”

Republicans don’t agree that writing down loan principals would be worth the additional risk to taxpayers, but some also have been critical of DeMarco for not fully embracing their attempts to shut down Fannie Mae and Freddie Mac quickly or for not doing more to reduce executive pay.

For his part, DeMarco warned in an interview that writing down loan amounts is no panacea and that, regardless, “there’s no free lunch.”

DeMarco has his admirers in Congress and elsewhere, and he said he has no intention of bowing to outside pressures or leaving his post, which he has held since mid-2009.

“He’s the bravest guy in D.C.” for steadfastly resisting the call for write-downs, said Jaret Seiberg, a senior policy analyst with financial services firm Guggenheim Partners. “Agree with him or disagree with him, you’ve got to respect him.”

For months, Obama administration officials, lawmakers and others have pushed DeMarco to direct the companies to reduce the amount owed on mortgages held by delinquent, underwater homeowners. Many economists have said that those principal reductions could stem the tide of foreclosures.

Such a move could jolt the market because Fannie and Freddie play such a major part in the roughly $10-trillion mortgage market. Yet DeMarco has said his priority is protecting the $188 billion of taxpayer money that has been pumped into the companies since the government seized them in 2008.

Despite his opposition to write-downs, DeMarco said he is considering new incentives from the administration that could make it less costly for Fannie and Freddie to reduce loan amounts. The incentives include increased financial aid to mortgage owners that agree to lower principal owed on home loans.

“We all recognize this is a very challenged environment for the country and there’s been a whole lot of hurt out there. We want to do the right thing,” DeMarco said. “But we’re also mindful that there’s no free lunch here, that there are people who have to pay this bill.”

So far, DeMarco has argued that principal reductions would reduce the value of bad mortgages owned by Fannie and Freddie by about $100 billion, increasing losses on the huge taxpayer investments in the companies.

A wide-scale program also could encourage homeowners who have been making their payments to fall behind intentionally so they could get a reduction on their mortgages, he said.

DeMarco has insisted that there are more effective — and less costly — ways to help struggling homeowners, such as reducing interest rates. Fannie and Freddie already are doing that.

He’s also concerned that principal reductions could benefit large banks by making it more likely that the second mortgages they hold would be paid off by underwater homeowners, while taxpayers still would be on the hook for any losses on the first mortgages.

But many analysts said that most borrowers who owe more than their homes are worth don’t have second mortgages and that those who do would find that those lenders too may be required to share in the loss.

DeMarco’s opposition to principal reductions has sparked calls for his firing. But it is very difficult for a president to remove the head of an independent agency. And Republicans have blocked Obama’s attempts to appoint a new director, who must be confirmed by the Senate.

“We’re kind of stuck with him,” said Rep. Elijah Cummings (D-Md.), who has met with DeMarco several times to plead for a change in policy. “The president is stuck, the Congress is stuck and folks who are going through foreclosure, they are stuck.”

In the face of intense pressure, DeMarco said he’s committed to staying in the job.

“My career’s been devoted to an array of government jobs in which doing the right thing ... for the country and the taxpayer has been central to my oath of office and to the work that I have done,” he said.

DeMarco, 52, who holds a doctorate in economics, has been a Washington bureaucrat for about 25 years with stops at the Government Accountability Office, Treasury Department and Social Security Administration.

In 2006, he became deputy director of the Office of Federal Housing Enterprise Oversight, which morphed into the FHFA.

“He’s really a devoted public servant,” said the housing agency’s former director, James Lockhart. “In many ways, he’s the most experienced person in the government on these issues.”

When Lockhart, a political appointee of President George W. Bush, left the FHFA in August 2009, DeMarco became acting director. But DeMarco, a civil servant, lacks the backing of the Obama administration, which makes the job more difficult, Lockhart said.

Lockhart said there is a role for principal reductions to help the housing market, but he said he understands DeMarco’s concerns. So do many congressional Republicans.

“If you start doing write-downs, the loss to taxpayers will be even greater,” said Rep. Scott Garrett (R-N.J.), who chairs a House subcommittee that oversees Fannie and Freddie. “He’s in a very tough situation, and I think he’s handling it as well as anybody could.”

DeMarco said he’s only trying to follow the law, which requires him to “preserve and conserve” the assets of the companies. If members of Congress believe principal reductions are a priority, they should change the law, he said.

But given the bitter partisan divide in an election year, Democrats said they would never be able to get such legislation passed. Obama could try to use a recess appointment to replace DeMarco, but analysts said he’s unlikely to do that after the controversy surrounding his recess appointments in January.

Instead, administration officials are working with congressional Democrats to try to change DeMarco’s mind.

“If somebody were to write a book about this situation 20 years from now,” Cummings said, “they’ll write that here was a man who could have made a difference and didn’t.”