On May 1, President Obama nominated 11-term Rep. Mel Watt, D-N.C. (in photo), to head the Federal Housing Finance Agency, established in July 2008 to oversee troubled mortgage giants Fannie Mae and Freddie Mac. Watt has a history of making racially-charged statements that are way over the line, even by the standards of the contemporary "civil rights" movement. The two federally-chartered, publicly-traded companies, under conservatorship for almost as long as FHFA has been around, own or guarantee more than $5 trillion in home mortgages.
If approved by the Senate, Watt would replace Acting Director Edward DeMarco, who has been under fire despite having done an even-handed job. Actually, his even-handedness has been the main problem.
The Federal Housing Finance Agency is a creature of national emergency. Almost a half-decade ago, with the balance sheets of the nation's major financial institutions rapidly deteriorating, the U.S. Senate, following the lead of the House more than a year earlier, enacted the Housing and Economic Recovery Act (P.L. 110-289). This law, among other things, established FHFA as an independent regulatory agency with jurisdiction over Fannie Mae, Freddie Mac and the dozen Federal Home Loan Banks. President George W. Bush, with a minimum of fanfare, signed the measure on July 30, 2008. FHFA superseded the existing Fannie Mae/Freddie Mac regulator, the U.S. Department of Housing and Urban Development's Office of Federal Housing Enterprise Oversight (OFHEO), and the savings & loan industry regulator, the Federal Housing Finance Board. OFHEO Director James Lockhart, an old friend and Yale classmate of Bush who had headed Pension Benefit Guaranty Corp. during the presidency of Bush's father, became director of the new successor agency.
Lockhart faced an unenviable job. And it would get more unenviable over the following weeks. The nation's mortgage banks, savings & loans, and mortgage banks had become dangerously undercapitalized during 2008, the result largely of pressure from the federal government, and equally importantly, nonprofit community and civil rights groups, into dramatically lowering underwriting standards to accommodate marginally qualified ("underserved") borrowers. The Washington, D.C.-based Fannie Mae and the McLean, Va.-based Freddie Mac, each a federally-chartered Government-Sponsored Enterprise (GSE), were willing to be tethered to this pressure so as to keep their duopoly advantages over competitors. And they were thinking in the short run. The GSEs now were buying a combined roughly 70 percent of all new mortgages, a rising portion of which were geared toward subprime borrowers, for eventual bundling into bonds for sale to outside investors. As such, they were unprepared in the event these mortgages could not be paid back. Likewise at heightened risk were large investment houses in the U.S. and abroad who bought these bonds, better known as "mortgage-backed securities," from Fannie Mae/Freddie Mac. House prices, having declined during 2007, were continuing their downward path in 2008. As mortgage-backed securities depended on home market values as collateral, the unsustainable nature of the mortgage boom was becoming evident. The entire financial system now increasingly hinged on mortgages underwritten to borrowers who had little or no ability to repay them.
The signs of disaster were around. Bear Stearns already had collapsed in early 2008 and was sold to JPMorgan Chase that March via a bailout brokered by the Federal Reserve Bank of New York. Six months later, in September, Merrill Lynch, a financial services firm with $2.2 trillion in client assets, went under and was taken over by Bank of America. Lehman Brothers, another Wall Street titan, with some $600 billion in assets under management, filed for bankruptcy; it was the largest Chapter 11 filing in U.S. history. Weeks later, on October 3, Congress passed and President Bush signed into law the Troubled Asset Relief Program, or TARP, creating a $700 billion line of credit for the nation's banks and other financial institutions, many of them now facing bankruptcy. The Housing and Economic Recovery Act appeared was unable to anticipate much less contain the financial tsunami.
It was during the tsunami's leading edge - September 7, 2008, to be exact - that the new FHFA, urged by Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, seized Fannie Mae and Freddie Mac, and placed the companies under conservatorship rather than risk a shareholder and bondholder wipeout. In the waning months of the Bush administration, the Treasury raised the credit line of each GSE from $2.25 billion to $100 billion. Obama administration Treasury Secretary Timothy Geithner, believing this to be insufficient, in February 2009 further raised the limit of each to $200 billion. And that December, he removed the caps altogether. This "too big to fail" arrangement, however, wasn't free money. The U.S. government now effectively owned 80 percent of the common stock in Fannie and Freddie under warrants provided by the original bailout. Dividends, set at the high rate of 10 percent, would have to be returned to the government as compensation for the latter's investment. And in an agreement reached with the Treasury Department that went into effect this year, the GSEs will be allowed to retain only $3 billion in net worth; any profit beyond that would go to taxpayers.
The months beyond September 2008, meanwhile, would see further deterioration in the housing market in the form of rising foreclosures, a severe slowdown in housing starts, and a sharp rise in the proportion of mortgaged homes with negative equity; i.e., whose outstanding principle exceeded their market value. Beyond damage control, there was little for the time being that FHFA could do. James Lockhart understood the issues, having headed its predecessor agency, OFHEO, since the middle of 2006. And to his credit, early in his tenure he recognized that Fannie Mae and Freddie Mac had been taking on too much risk; he called for the creation of "an empowered regulator." The GSEs, he noted, "present very large systemic risks to financial markets and financial institutions" - words, in fact, that led to the creation of FHFA. But with a full-scale housing recession - some observers like Karl Case, co-creator of the Case-Shiller housing price index, saw a depression - the Obama administration wasn't about to give him much administrative leeway. In late summer 2009, Lockhart left the agency to become vice chairman of the New York-based private equity firm of WL Ross & Co.
Lockhart's replacement, Edward DeMarco, was the right man for the job. A trained economist and career civil servant, DeMarco had served as chief operating officer for the Federal Housing Finance Agency and OFHEO. Previous to that, he was a financial analyst for the Social Security Administration, the U.S. Treasury Department and the General Accounting Office (GAO). As early as 1990, while as a GAO research fellow, DeMarco concluded that the two GSEs needed closer supervision, lest it risk calamity. During his tenure as head of the FHFA, the agency has raised fees that Fannie Mae and Freddie Mac charge investors in return for guaranteeing timely payments on mortgage bonds. Such a move, DeMarco believes, will make it easier for other secondary mortgage lenders to enter the market. It's part of a larger downsizing strategy. DeMarco has been persuading the two companies to consolidate operations as much as possible and to reduce their asset portfolios by 15 percent annually. His goals are clear: Bring Fannie Mae and Freddie Mac back to solvency; end conservatorship; and eliminate the firms' federally-granted market advantages.
Unfortunately, Ed DeMarco is a controversial figure. And what has made him controversial has been his unwillingness, for the most part, to provide forgiveness for seriously delinquent Fannie Mae- and Freddie Mac-backed loans. He has stated, and with good reason, that the availability of such assistance would give homeowners, delinquent or not, every incentive to stop or delay payments. Such a policy, he argues, would deepen the GSE crisis and expose taxpayers to ever higher risk. Last July, DeMarco released a report showing at best a marginal net gain, and most likely a loss, if he were to put in place then-Treasury Secretary Timothy Geithner's proposal to reimburse Fannie Mae and Freddie Mac for forgiving outstanding loan balances for about a half-million distressed homeowners. Moreover, noted DeMarco, such a move would undermine investor confidence.
Such a position has cast Ed DeMarco as the man with a black hat, a shill for big banks. Yet his primary obligation, in fact, is the protection of investments of employees and especially retirees. "Mortgage-backed securities are critical elements in the investment of our retired citizens that have bond portfolios and are relying on that as a source of income," he remarked last fall. "We're thinking, ‘This isn't some huge hedge fund that's at risk here. This is citizens across the country.'" DeMarco added: "The approach we take here is we try very hard to be apolitical about it." Ironically, and perhaps unbeknownst to his critics, DeMarco recently has yielded on the issue of loan forgiveness. Late this March, FHFA announced that borrowers more than 90 days late on their mortgages automatically will be eligible for a loan modification to reduce monthly payments - that is, without having to document financial hardship. "This new option," DeMarco said, "gives delinquent borrowers another path to avoid foreclosure. We will still encourage such borrowers to provide documentation to support other modification options that would likely result in additional borrower savings."
Fire-breathing community activist groups on the hard Left haven't been impressed. During the last couple years, they've launched a nonstop campaign to cast DeMarco as a public enemy - and mortgaged homeowners as his salt-of-the-earth victims. Change.org, the website that made Trayvon Martin a household name, launched an online petition in March 2012 claiming DeMarco is "the biggest obstacle to serious economic recovery." Though thoroughly ludicrous, this statement has its supporters, particularly in the form of a coalition called "The New Bottom Line." The website of this Washington, D.C.-based group - it lists a phone number but no address - describes itself as "a national campaign fueled by a coalition of community organizations, congregations, labor unions, and individuals working together to build a movement that challenges established big bank interests on behalf of struggling and middle-class communities." In typical heavy-breathing language, the website declares: "American families are struggling while the big Wall Street banks that destroyed the economy are raking in record profits. Too many politicians are catering to Wall Street. Their concern? Wall Street's Bottom Line. We need a new bottom line that puts the economic interests and financial security of working American families first." But there are obstacles to rejuvenation, the group notes. One of them is named Ed DeMarco.
The New Bottom Line doesn't hide its desire to run Ed DeMarco out of office. Its website features a "Dump DeMarco Campaign" section. Aside a photo of their least favorite federal official, a caption reads: "Biggest Obstacle to Economic Recovery? Meet Ed DeMarco, the Bush Appointee who works for Obama." For inquiring readers seeking progress reports, the site has a "Dump DeMarco Timeline." Predictably, the New Bottom Line is ecstatic over President Obama's choice of Congressman Mel Watt as the next director of the Federal Housing Finance Agency. "Thank you President Obama," reads the website. "Thank President Obama for nominating a replacement for Ed DeMarco, and ask him to push for a speedy confirmation of FHFA nominee Mel Watt in the Senate."
But it isn't just grassroots radicals who want DeMarco out. A number of prominent Democrats in Congress are bent on this. Sen. Elizabeth Warren, D-Mass., who had been calling for DeMarco's removal even before the naming of Watt as his replacement, recently denounced DeMarco as someone who "has refused repeatedly - often with cold indifference - to work with families struggling to save their homes." And Sen. Barbara Boxer, D-Calif., following a discussion on Capitol Hill last year with DeMarco, declared the encounter to be "the worst meeting I've had in my life." Remarked Boxer: "He didn't have any motivation that I could see to help people." In the minds of such lawmakers, "help" means subsidizing mortgage borrowers who never should have gotten loans in the first place and exposing taxpayers, many of modest means themselves, to tens of billions of dollars of extra bailout costs.
The anti-DeMarco campaign has an ally in President Obama, who has been trying for some time to find a replacement. In November 2010, Obama nominated North Carolina Banking Commissioner Joseph Smith to serve as the next FHFA director. Smith had helped put in place some of the nation's first regulations protecting borrowers from unscrupulous lenders. The Senate Banking Committee approved Smith that December by a 16-6 vote. But a growing number of senators, led by the committee's ranking minority member, Sen. Richard Shelby, R-Ala., feared Smith would be unable to resist pressure from the administration to slash mortgage balances for seriously delinquent homeowners. The following month, in January 2011, Smith, sensing approval would be an uphill battle, withdrew his name from nomination.
More than two years passed, but without a re-nomination. Congress remained so divided over whether to bail out delinquent borrowers that President Obama put the issue on the back burner. Possibly even he recognized DeMarco's integrity and competence. But under increasing pressure from his party, Obama on May 1 unveiled Mel Watt as his choice as a replacement. Admirers on Capitol Hill cheered the announcement. Sen. Warren said Watt is "a thoughtful policymaker with a deep background in finance and a long record as a champion for working families." Ethically-challenged Rep. Charles Rangel, D-N.Y., said Watt's "diligence and candor will not only enhance President Obama's cabinet, but will also bring more diversity and expertise to his team." But some Republicans believe Watt is wrong for the job, indeed, more wrong than Joseph Smith ever could have been. Sen. Bob Corker, R-Tenn., a member of the Senate Banking Committee explained: "I could not be more disappointed in this nomination. This gives new meaning to the adage that the fox is guarding the hen house. The debate around his nomination will illuminate for all Americans why Fannie and Freddie failed so miserably." A closer look at the nominee suggests such an assessment isn't way off.
Melvin Luther "Mel" Watt, an attorney, would seem an attractive candidate for FHFA director - at least by standards of the Obama White House. Now 68, the longtime Charlotte-area resident has represented the 12th congressional district of North Carolina since the start of 1993. He had practiced law for more than two decades, specializing in minority business and economic development, before his victorious campaign for Congress in 1992. He currently serves on both the House Committee on Financial Services and Committee on the Judiciary. As a black Democrat, he's a classic example of the modern civil rights mindset, ever thinking in terms of the impact of policy on black America first and on America as a whole second. A close friend of President Obama, he helped bring the Democratic Party's 2012 presidential nominating convention to his home town. Obama praised Watt as the nominee for FHFA director this way: "Mel has led efforts to rein in unscrupulous mortgage lenders. He's helped protect consumers from the kind of reckless risk-taking that led to the financial crisis in the first place. And he's fought to give more Americans in low-income neighborhoods access to affordable housing."
There is a certain irony here. The "reckless risk-taking" of which the president speaks was very much a product of aggressive demands by nonprofit civil rights and community groups to lower risk assessment standards so as to "reach" more black and Hispanics. Starting about 20 years ago, Congress and federal regulators increasingly rode herd on primary mortgage lenders and Fannie Mae/Freddie Mac to boost minority homeownership. Much so-called "predatory lending" better could be termed "predatory borrowing." By the last decade, federal policy encouraged a casting aside of sensible underwriting standards in its application of the affirmative action principle by geography, income and race. In a real sense, the mortgage meltdown was "the diversity recession."
Much as Rep. Watt is an adversary of the mortgage industry when it comes to steering loans to minorities and their neighborhoods, he's also tight with that industry when it comes to generating campaign cash. As a native of Charlotte, the nation's premiere banking center behind New York City - Bank of America and Wells Fargo's Eastern Division (formerly Wachovia Bank) are based in Charlotte - he's in the right place. As a member of the House Financial Services Committee, he's in a position to smooth the way for mergers and acquisitions, especially over "diversity" issues. Knowing this, banks have become reliable political backers. During his political career, Watt has received more than $365,000 in donations from commercial banks alone. That's not even including other financial intermediaries. Bank of America, Goldman-Sachs and American Express have been among his prominent source of support. He's delivered for them, too, supporting the 1999 repeal of the Glass-Steagall Act's firewall separating banking and investment, among other deregulatory initiatives. In recent years, he held frequent receptions at his home for financial industry lobbyists just before key votes on the eventually-enacted Dodd-Frank bank reform legislation. Such actions drew the attention of the Office of Congressional Ethics. Though eventually cleared of wrongdoing, Watt later tried to defund the office.
In the face of this, one has to wonder why the furies of the Left are so obsessed over getting Ed DeMarco out of the picture and inserting Mel Watt in his place. A recent article in the iconoclastically liberal Washington Monthly suggests the administration is trying to cover its tracks:
So why the liberal crusade against DeMarco? President Obama's economic and political teams have simply engaged in a skillful public relations effort. By offloading the entire responsibility for the nation's housing woes to one regulator, the White House has used DeMarco as a foil, averting their own shameful responsibility in designing the failed HAMP program and letting banks off with sweetheart settlement deals for systematic crimes committed against homeowners. DeMarco turns out to be very useful to the White House, absorbing all the scorn of liberal housing groups while the Administration floats along without blame.
There is, however, another reason for the Left's enthusiasm for Mel Watt: He's quick on the draw when it comes to denouncing "racism." Rep. Watt, who chaired the Congressional Black Caucus from 2005 to 2007, doesn't think white people can be trusted. Back on October 14, 2005, during a hearing held by the National Commission on the Voting Rights Act, he stated: "There would be a substantial majority of white voters who would say that under no circumstances would they vote for an African-American candidate." Such voters, he emphasized, "need to be factored out the equation" because "I've got no use for them." Black voters, unlike white voters, he added, don't have "an absolute commitment" to race-based voting.
All of this is preposterous. In fact, blacks take race into account far more than do whites. Rep. Watt, in fact, owes his very job to this. The 12th district of North Carolina has to be one of the most comically obvious cases of gerrymandering in our nation's history. Take a look at it on any congressional map - its shape recalls Lake of the Ozarks. Even the U.S. Supreme Court, in a case known as Shaw v. Reno (1993), declared the post-1990 Census redistricting unconstitutional and told the North Carolina legislature to redraw the boudaries. State lawmakers made some cosmetic changes that eventually were acceptable. The ulterior motive was to expand black representation and thus mitigate the likelihood of a Voting Rights Act lawsuit. The legislature practiced what they were not allowed to preach openly: Black voters are far more likely to prefer black candidates over white ones, all things held equal. Exit polls, for example, revealed that at least 95 of blacks voted for Obama in each of the 2008 and 2012 presidential elections. By contrast, about only about 55 to 60 percent of non-Hispanic whites voted for Obama's respective white GOP opponents, McCain and Romney.
Watt has a real chip on his shoulder about white candidates. Back in 2004, Ralph Nader, hardly a conservative, asserted that Watt belligerently confronted him, and demanded that he drop out of the presidential race as a Green Party candidate and support Democratic nominee John Kerry. According to Nader, Rep. Watt had said, "You're just another arrogant white man - telling us what we can do - it's all about your ego - another fucking arrogant white man." Nader demanded an apology from Watt, but never got one.
Watt's sense of racial victimhood carries over into his views on mortgage lending. His insistence that FHFA drive down outstanding mortgage principal owed by distressed borrowers is driven in large measure by a conviction that such a course of action disproportionately would benefit blacks. On June 12, 2008, during a hearing before the House Judiciary Committee, as mortgage lenders were becoming dangerously undercapitalized and the subprime market was collapsing, Watt demanded the creation of a government task force to investigate and combat racial discrimination in mortgage lending. "There needs to be a more coordinated approach to dealing with these issues of discrimination, failure to be fair in loan terms," he remarked. What planet was he living on? It was aggressive outreach by the mortgage industry to blacks and Hispanics more than anything else that drove the credit meltdown. The aggressive securitization of mortgage loans was an effect of this obsession, not a cause.
On balance, then, Melvin Watt has all the appearance of a bank shakedown artist. Given his position, he operates in a much different manner than does Attorney General Eric Holder. But he's highly effective all the same. The question thus arises: Why would anyone want someone like this running the Federal Housing Finance Agency, which currently manages about 60 percent of all recent residential mortgages in the U.S.? Understand this: FHFA isn't a standard-issue regulator; it's a conservator. The purpose of Fannie Mae/Freddie Mac conservatorship, as FHFA defines it, is "to preserve and conserve each Enterprise's assets and property and restore the Enterprises to a sound financial condition so they can continue to fulfill their statutory mission of promoting liquidity and efficiency in the nation's housing finance markets." With Watt in charge of debt on more than 30 million homes, the agency's implicit main mission would be to reward borrower failure, and with a sense of racial payback. The result would be far slower progress toward achieving sound balance sheets. And the general public would bear the cost.
Ironically, during the past year Fannie Mae and Freddie Mac's balance sheets have been improving. And that is because of the upswing in the housing market. The Standard & Poor's/Case Shiller Housing Index of single-family detached dwellings in 20 U.S. metro areas, for example, registered a 10.9 percent increase in real house prices during this March over March 2012, the largest 12-month gain in seven years. And real estate information service DataQuick reported this past Tuesday that in the six counties comprising metro Southern California the median price for all homes this past May rose to $368,000, or 24.7 percent higher than for the previous May.
This market boost has stimulated mortgage lending, which in turn has enabled Fannie Mae and Freddie Mac to buy more loans, sell them to investors, and send the dividends to the federal coffers. Through the quarter ending this March 31, Fannie Mae and Freddie Mac had received a combined nearly $190 billion in taxpayer aid. Fannie Mae got about $117 billion; Freddie Mac got $72 billion. But growing dividends have defrayed these subsidies. Last month, Fannie Mae, the larger of the two companies, announced a record quarterly net income (i.e., profit) of $8.1 billion for the three-month period. This will enable the company to send a $59.4 billion payment to the U.S. Treasury, boosting the grand total of dividend contributions to $95 billion. And Freddie Mac, which reported a $4.6 billion profit, will send $7 billion, boosting its total dividend payback to more than $36 billion.
But this encouraging trend has its limits. The housing rebound is very much a beneficiary of a less overt but even larger bailout initiated last September: an expansion of the Federal Reserve System's ongoing asset purchase program by another $85 billion a month; $45 billion in U.S. Treasury securities and $40 billion in Fannie Mae/Freddie Mac mortgage-backed securities. The Fannie Mae/Freddie Mac portion, in other words, amounts to nearly a half-trillion dollars per year to hold down mortgage interest rates. The Fed's "quantitative easing" strategy - the third round thus far - has the advantage of persuading banks to invest excess cash and invigorate the economy. But there is a real downside: a heightened risk of aggressive inflation, and with it, substantially higher interest rates.
Government conservatorship, by nature, is an unsatisfactory way of running an enterprise. The best that can be said of it, in the context of the Fannie Mae/Freddie Mac takeover, is that it is a better alternative to an outright collapse, which would have cleaned out investors of hundreds of billions of dollars and inflict enormous damage on private-sector credit ratings. That said, conservatorship doesn't have to be accompanied by a bailout. And it certainly doesn't have to accommodate the homeownership-as-moral-entitlement mentality that primarily drove the mortgage crisis in the first place.
For the last few years Congress has been in general agreement over the need to replace Fannie Mae and Freddie Mac. But the wide variation among proposals put forth thus far suggests corresponding legislation is years away. And that means the Federal Housing Finance Agency will be around for some time. Hopefully, the agency will be headed by someone who is competent, fair-minded and fully committed to removing these companies' lifeline to the public trough. Mel Watt, unlike Ed DeMarco, doesn't fit the bill. Frankly, there are few thoughts scarier right now than a man like Watt being in charge of more than $5 trillion in financial assets.
Related:
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