Ed DeMarco Deserves a Medal

The same people who helped create the $180 billion bailout of Fannie Mae and Freddie Mac are now demanding the head of Ed DeMarco, the acting director of the Federal Housing Finance Agency (FHFA), which regulates Fannie Mae and Freddie Mac. Some commentators have gone as far to say that the “single largest obstacle to meaningful economic recovery is a man who most Americans have probably never heard of, Edward J. DeMarco.” Of course, such a statement shows a stunning lack of understanding of both the mortgage market and the economy in general.

Why are so many upset with Mr.DeMarco? One simple reason: he is following the law. Some believe that broadly writing down the mortgages of underwater borrowers would turn the economy around, regardless of the cost to the taxpayer. While that assumption itself is highly questionable, it doesn’t matter. As I’ve detailed elsewhere, the current statutory language governing FHFA limits Mr. Demarco from doing so. Yes, some proponents have found language elsewhere in the statute they believe allows sticking it to the taxpayer for another $100 billion. But their argument relies on general introductory sections of the statute, not the powers and duties of FHFA as a conservator. Statutory interpretation 101 is that more specific sections trump general introductory sections. General sections have “no power to give what the text of the statute takes away” (Demore v. Kim, 538 U.S. 510, 535). One would expect senior members of Congress to understand that.

Of course, if some members of Congress believe we should spend $100 billion bailing out deadbeats, then why don’t they simply offer a bill on the floors of the House and Senate doing so? I’m sure House leadership would be happy to have a vote on the issue. The notion, instead, that an unelected, un-appointed, acting agency head should, in the absence of clear authority to do so, spend $100 billion is simply offensive to our system of government. Not to mention it probably violates the Anti-Deficiency Act, and would be hence subject to criminal prosecution.

Unfortunately, one of the common themes of the financial crisis was outright unlawful behavior by the financial regulators, such as the FDIC broad guarantee of bank debt, which lacked any statutory basis. Mr. DeMarco is to be commended for staying within the letter of the law. If Congress had wanted Fannie and Freddie to bailout underwater borrowers, they could have simply written that into the statute. Congress didn’t, regardless of whatever spin any current members of Congress might want to place on the issue.

Random Thoughts on Obama’s New Mortgage Plan

In case you missed it, President Obama gave a big speech out in Las Vegas about both his “jobs” plan and a new plan to help underwater borrowers re-finance their mortgage. First, let’s recognize that it is not really “his” plan. The proposal is being issued by the Federal Housing Finance Agency (FHFA), an independent regulator that the President is supposed to have no control over. Frankly, I find it troubling for a president to be so involved with an independent agency. If a president was out giving speeches when the Federal Reserve changed interest rates, we would all call that bizarre. It is no different here. As someone involved in drafting the law that created FHFA, I can say Congress considered, and rejected, the option of having this agency accountable to the president.

On to the substance. Perhaps most striking is that this plan does nothing for the housing market. Does it increase demand for housing? No. Does it reduce the supply of excess homes or help move the massive shadow inventory? Again, No. Does it even help those most in need? No. It is available only to those who have already had a mortgage for over two years, are current on their mortgage, and have missed no more than one payment per year. Basically helping only those that do not need any help.

The logic of the plan is that by reducing mortgage rates, you reduce monthly payments, which would increase consumer spending. The flaw in that logic is that while a mortgage is one person’s liability, it is another person’s asset. So you are simply making one party wealthier while making another poorer. It is not clear that the impact on aggregate spending should be anything other than zero.

Most troubling about the the plan, is that the program it is based upon, HARP, is likely illegal. Both the Fannie and Freddie charters require that if a loan is above 80 percent loan-to-value, it must have mortgage insurance. Yet the heart of HARP is a waiver of this requirement. Apparently FHFA claims these are not “new” loans, but just modifications. In that case why in the world would you modify a loan that is current and does not appear in any danger of default. Sadly one of the many things lost in the financial crisis is a basic respect for the rule of law. Our financial regulators have too often embraced a culture of lawlessness in name of saving our financial system (with little to show for it).