In 2004, I had the unique distinction of being perhaps the only person in history to have the U.S. Senate place a bounty on his head. I didn't rob a train. My crime was leading a federal investigation into misconduct at Fannie Mae.
When I served as the director of the Office of Federal Housing Enterprise Oversight, the Senate Appropriations Committee placed a proviso into my agency's budget authorization declaring that $10 million of the agency's budget could not be spent as long as I was in office. It wasn't quite a "wanted dead or alive" pronouncement, but the message from Fannie Mae and its many allies was clear—do your job at your own peril. This was only a small part of the intense political pressure I faced to ignore my legal obligations and accede to the popular sentiment at the time, which was that Fannie Mae could do no wrong.
Ed DeMarco, the acting director of the Federal Housing Finance Agency (the successor to OFHEO), must be feeling as popular today as I did back then. He is under relentless pressure to accede to demands that he direct Fannie Mae and Freddie Mac to implement a broad principal forgiveness program for mortgage borrowers. Both firms are currently in conservatorship and backed by the taxpayers (that backing stands at $188 billion in losses so far). As conservator of the firms Ed has taken the position that his legal responsibility to minimize taxpayer losses precludes him from implementing a loss-generating principal forgiveness program.
Proponents of principal forgiveness are certainly well-intentioned and cannot be faulted for seeking opportunities to help troubled borrowers. That energy should be properly channeled into well-grounded initiatives, and not directed at efforts to unduly pressure the FHFA to put a policy agenda ahead of a clear legal responsibility. However meritorious a political or policy agenda may be, it cannot supersede the legal responsibility of a safety and soundness regulator.
The debate around Ed's performance as head of FHFA should not be characterized as one of being "for or against" principal forgiveness. It is first and foremost about preserving the integrity of the regulatory process. History is replete with examples of what can go wrong (e.g., the Keating Five) when undue political pressure interferes with the regulatory process. Financial safety and soundness regulators are unique in the government. They are not policy arms of the government. They were created with a primary mission: to regulate for the financial health of the entities they supervise and if those entities manage to become insolvent anyway, then minimize the resulting losses.
This mission is so paramount that safety and soundness regulators are structured to be relatively independent of the executive branch and the budgetary arm-twisting of Congress (except in the curious case of my old agency). The FHFA is similar in this regard to the bank regulatory agencies—the OCC, the FDIC and the Federal Reserve (which is independent not just as a central bank, but also as a banking regulator).
I have known Ed for 20 years and can say without hesitation that he is a very honorable career public servant. He has used allowable discretion to direct Fannie Mae and Freddie Mac to participate in programs that have helped a very significant number of distressed borrowers. However, there are limits to his discretion and he cannot read complete flexibility into the law he administers where it simply does not exist.
He recently indicated that the agency is considering the impact of new financial incentives on the ability of the enterprises to participate in a principal forgiveness program. Whatever the outcome of the agency's analysis, we should respect the decision. The proper recourse for any dissatisfaction is to change the law, and not a call for the head of Ed DeMarco.
Armando Falcon is CEO of Falcon Capital Advisors. He served as director of the Office of Federal Housing Enterprise Oversight from 1999-2005.
