DeMarco Shrinks Fannie-Freddie Without Help From Congress

The man with power over more than half of U.S. mortgages lives in a 1961 brick split-level house. There’s a basketball hoop in the driveway and a green Subaru Outback in the carport. The homes on Edward J. DeMarco’s block are so close that neighbors see into each other’s windows.

This surprised several dozen demonstrators, one in a vampire costume, who arrived at DeMarco’s residence in a middle- class Washington suburb last month to demand he quit his job as acting director of the Federal Housing Finance Agency.

“My home is better-looking than this,” said Catrese Tucker, a Massachusetts toll collector whose property is in foreclosure. “I don’t believe this is his home.”

As the overseer of mortgage giants Fannie Mae (FNMA) and Freddie Mac, DeMarco has become the focus of ire from homeowners and lawmakers who want more aid for troubled borrowers, even as the two government-run companies subsist on taxpayer life support that now totals $190 billion.

The unassuming career economist is looking beyond the current housing crisis, which shows signs of easing with home prices finally on the rise. Instead, DeMarco is working toward a day when the government no longer backs most U.S. home loans.

Republicans and Democrats in Congress and President Barack Obama all say they want to wind down and replace Fannie Mae and Freddie Mac, yet they’ve been deadlocked on a solution. That makes DeMarco perhaps the only official in Washington actively working to shrink the government-sponsored enterprises.

Without Consent

“The FHFA under the leadership of Acting Director DeMarco is slowly but surely enacting housing finance reform without the guidance or consent of Congress,” said Isaac Boltansky, a policy analyst for Compass Point Research & Trading LLC. “That’s due in part to the complete inability for Congress to find any consensus.”

Fannie Mae and Freddie Mac buy mortgages and package them into securities on which they guarantee payments of principal and interest. This adds liquidity to the housing market -- effectively taking the mortgages off banks’ books and freeing up funds for lenders to make new loans.

The enterprises, which now own or back $5.2 trillion in mortgages, pushed themselves to the brink of insolvency in 2008 after investing in risky loans. In what was supposed to be a temporary arrangement, the federal government stepped in with a financial lifeline and put the newly created FHFA in control.

Private Capital

Under DeMarco, the agency has begun changing how the two companies charge for assuming mortgage risk, in an attempt to lure private capital back into the market. It is also pushing the formerly competing companies to synchronize their operations and is working to create common standards and processes for issuing mortgage-backed securities that could be adopted by any entity, public or private.

In an interview, DeMarco said he sees these steps as investments that could pay off no matter what lawmakers eventually decide to do with Fannie Mae and Freddie Mac.

“We are trying very hard to show positive progress towards a future housing finance system in making repairs that address some of the many shortcomings that contributed to the crisis,” he said.

DeMarco, 52, has been focusing on Fannie Mae and Freddie Mac for most of a career that spans decades. At the same time, he said, this isn’t where he expected to find himself four years after the companies were taken into U.S. conservatorship.

Four-Year ‘Mess’

“When we put Fannie and Freddie into conservatorship, I don’t think any of us thought it was going to be four years before we got through this mess,” said James B. Lockhart, DeMarco’s predecessor as director of FHFA, now vice chairman of the investment firm WL Ross & Co. LLC.

The oldest of six children in a family that moved around the U.S. following his father’s career as an engineer, DeMarco attended Notre Dame University as an undergraduate, majoring in economics.

“I was attracted to the notion that market economies are vehicles for allocating scarce resources in an efficient manner,” he said. “It’s those basic ideas that still very much motivate me today.”

He went on to earn a doctorate in economics from the University of Maryland, writing his dissertation on taxes. He began scrutinizing the government-sponsored enterprises in 1986 as a research fellow at what was then called the General Accounting Office.

Implicit Guarantee

His conclusion, published in a 1990 report: Fannie Mae and Freddie Mac were operating with little oversight as private companies backed by the implicit understanding that the Treasury would rescue them if necessary. The companies needed much closer federal supervision “to keep emerging problems from imposing losses on taxpayers,” the report said. Later that decade, as a Treasury official, DeMarco continued to warn that the government-sponsored enterprises needed more oversight because they posed risks to taxpayers.

In 2006, he became deputy director at the Office of Federal Housing Oversight, the predecessor to FHFA. He began running FHFA in an acting capacity after Lockhart’s departure in 2009. DeMarco remains in the role today because Republicans in the Senate have blocked White House attempts to install a political appointee in his place.

The fact that he is now in charge of dealing with the mess that he once warned about, he said, “gives me no pleasure.”

Studious Stickler

DeMarco goes to work every day in the same building where his father once worked as an engineer at the Department of Transportation. A slight man in wire-rimmed glasses who wears a U.S. flag pin on his lapel, he’s seen by employees as a manager who keeps close counsel with a small circle of advisers.

Colleagues and acquaintances describe him as self-effacing and even-tempered, a stickler for rules and personal responsibility who makes decisions based on careful study rather than political conviction.

“Whatever he does, he’s going to be methodical,” said Clifford Rossi, a business professor at the University of Maryland who overlapped with DeMarco at the Treasury in the 1990s. “He’s not shoot-from-the-hip kind of guy whatsoever. He’s not out there making stuff up as he goes.”

This meticulous approach carries through to DeMarco’s hobbies, including fantasy football -- at least until recently.

“His team stinks now,” one of DeMarco’s nephews said in an interview with the Notre Dame athletics website last year. “He’s too busy trying to fix the housing mess.”

Republican Accolades

DeMarco’s analytical style, especially when it comes to ensuring that Fannie Mae and Freddie Mac aid the housing market, has won accolades from Republicans who like his taxpayer-first approach. At the same time, his focus irks some Democrats, who say he doesn’t care enough about families in danger of losing their homes.

In one private meeting last year on Capitol Hill, he earned the displeasure of California Senator Barbara Boxer, a Democrat who has been pushing FHFA to expand aid to homeowners. According to people familiar with what happened, Boxer asked DeMarco why he hadn’t done more to help homeowners refinance their Fannie Mae or Freddie Mac mortgages at lower interest rates.

DeMarco’s answer: “Because it would roil the markets.”

“He didn’t have any motivation, that I could see, to help people,” Boxer said later in an interview with National Public Radio. She called it “the worst meeting I’ve had in my life.”

Ordinary Americans

DeMarco says his emphasis on protecting investors in mortgage-backed securities has been mischaracterized as sympathy for corporate interests when it’s really concern for ordinary Americans.

“Mortgage-backed securities are critical elements in the investments of our retired citizens that have bond portfolios and are relying on that as a source of income,” he said. “We’re thinking, ‘This isn’t some huge hedge fund that’s at risk here. This is citizens across the country’.”

FHFA did make it easier this year for so-called underwater borrowers who owe more than their homes are worth to refinance. Fannie Mae and Freddie Mac processed more than 600,000 loans under the government’s Home Affordable Refinance Program in the first eight months of this year, more than in all of 2011. Boxer and other members of Congress are pushing the agency to make still more changes to the program.

Like many homeowners, DeMarco has taken advantage of record-low interest rates in recent years. In April 2010, he refinanced into a 15-year loan on the house he and his wife bought in 1992 in Silver Spring, Maryland, for $230,000. The average rate that month on 15-year mortgages was 4.4 percent.

Shrinking Agencies

While public focus is on spurring refinancings, DeMarco has been taking steps to shrink Fannie Mae and Freddie Mac according to a blueprint FHFA released earlier this year.

FHFA has raised the fees the companies charge investors for guaranteeing payments on securities, a cost usually passed on to borrowers in the form of higher interest rates. The agency is poised to implement a new system next year that will raise prices even more in states where the companies lose the most money because the foreclosure process is slower.

FHFA is overseeing improvements in data collection to help Fannie Mae and Freddie Mac more quickly detect flaws in the loans they purchase. And the agency is at work on a new system for issuing securities that could serve as a precursor for new kinds of mortgage securities, including some issued jointly by the two companies or others in which private firms share risk with the government, DeMarco said.

“These are important stepping stones to coming up with an improved business model for the future,” he said.

Broad Impact

Such developments are incremental yet could have a broad impact ranging from the cost of borrowing to altering state foreclosure laws, Boltansky said.

“They represent meaningful shifts in how the housing- finance system is structured,” he said.

Most of this work has gained little public attention. Instead, DeMarco is best known for one controversial position: His longstanding refusal to forgive some debt on loans backed by Fannie Mae and Freddie Mac. He says that would encourage some struggling homeowners to stop paying their mortgages in the hope of getting a break.

In February, Treasury Secretary Timothy F. Geithner tried to persuade DeMarco to change his mind by offering to pay as much as two-thirds of the cost. At the end of July, DeMarco released an analysis that concluded that taxpayers were likely to lose money. The government-sponsored enterprises would continue to be barred from reducing loan principal, he decided.

In the aftermath, calls for Obama to replace DeMarco came from a diverse group that included members of Congress, New York Times columnist Paul Krugman, the United Steelworkers Union and even the Sierra Club, the pro-environment lobby.

Pink Slip

Activists emblazoned the words “Fire this Man” on posters below an unflattering closeup of DeMarco, his eyebrows raised and mouth open. And last month, they held a pizza party on the front lawn of the home where he and his wife, Garland, an accountant, raised their four children, delivering an oversize pink slip to the mailbox.

“They’ve been questioning his motivations in a way that I think is extremely unfair,” said Ted Gayer, co-director of the Economic Studies program at the Brookings Institution in Washington. “He’s this unassuming guy who just worked his way through the bureaucracy and found himself here at the focal point of a very intense debate.”

DeMarco’s reaction has been stoic, both publicly and, acquaintances say, in private.

“I well understand that housing finance in general and those two companies in particular attract a great deal of political interest, and understandably so,” DeMarco said. “The approach we take here is we try very hard to be apolitical about it.”

Election Outcome

DeMarco’s future will remain unclear until after the Nov. 6 presidential election. Republican nominee Mitt Romney hasn’t weighed in on the direction of FHFA.

If Obama wins, there’s a good chance DeMarco would remain in his acting position. Obama would probably want to put his own political appointee in DeMarco’s place, yet Republicans would probably continue to block a nominee. Obama could name an FHFA director during a congressional recess, though it’s unclear whether he’s willing to face the political blowback.

DeMarco, meanwhile, has no plans to leave.

“My approach from the beginning has been, as long as I’ve been asked to have this responsibility, to carry it out in the best way I can,” he said. “I always envisioned myself as a career official and I still am a career official.”

To contact the reporters on this story: Clea Benson in Washington at cbenson20@bloomberg.net; Emma Fidel in Washington at efidel@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net

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