While the Senate Banking Committee has clearly reached consensus on the need for mortgage finance reform, the process remains at a standstill beyond that.
The panel heard testimony Thursday from Ed DeMarco, acting director of the Federal Housing Finance Agency, who reiterated that the agency's ongoing efforts will be incomplete until Congress lays out a plan to bring the private sector back to the market.
"Our strategic plan for the enterprise conservatorships and the specific plans in the 2013 scorecard set forth a transition path, and FHFA's efforts to date to get that effort going," DeMarco said in his opening statement. "But we can't complete the transition until we know the final destination, and for that the country needs the Congress to set that destination."
The regulator's appearance on Capitol Hill comes as rumors swirl about his possible replacement. DeMarco assumed the role of acting director in 2009 when a Bush-appointed director resigned.
Press reports have suggested that Rep. Mel Watt, D-N.C., and economist Mark Zandi are both top candidates for the job, but the White House has been mum on its decision-making process thus far.
DeMarco has been a thorn in the side of the Obama administration and many liberal activists for his opposition to principal reductions, a concern that Sen. Jack Reed raised again at Thursday's hearing.
"Very systematic and thoughtful loan modifications could have dramatically improved the overall market sooner rather than later, could have led longer term to savings to taxpayers because properties that foreclosed at a loss to the investor and a terrible loss to the homeowner could have been avoided, and that didn't seem to be a…relevant part of your calculation," the Rhode Island Democrat told DeMarco after a lengthy back-and-forth on the issue.
Reed called the use of such writedowns "probably the most significant federal initiative that the Treasury Department initiated to try to help people who are facing foreclosure."
Nevertheless, the tone of the hearing was otherwise cordial, with many lawmakers expressing gratitude for DeMarco's service at the agency. Sen. Bob Corker took that one step further by questioning if a replacement at the agency is needed and urging the Obama administration to lay out in more detail its own plan for housing finance reform before putting someone new into the position.
"I know there's been discussion about a permanent replacement of some kind for you. I don't know why anybody would want to change something that's working so well," said Corker, who has previously raised concerns that Watt would be a political choice. "But I think if that were to be the case we certainly should hear from the administration explicitly about what they want to happen with Fannie and Freddie before that occurs. And hopefully the Senate and House will take action to make that explicit very quickly."
Corker also pressed DeMarco for more detail on his views about the role government should play under a reformed housing finance system.
"I think that with a $10 trillion single-family mortgage market, the government doesn't belong at zero or at 10. It belongs somewhere in between," DeMarco responded. "Really, the government can play a key role in terms of standards, rules, transparency and fairness in terms of how the market operates. That can go an awful long way to facilitating the effective role of private capital in funding and bearing the credit risk in the mortgage market."
DeMarco praised lawmakers' efforts to stop Congress from using hikes in the agencies' guarantee fees to offset unrelated government spending in the budget. A bipartisan group of senators
"By indicating that the Congress of the United States has agreed it does not want to use Fannie and Freddie to be funding part of the government, it then removes that as an issue or a barrier to actually doing something to bring these conservatorships to an end and rebuild the housing finance system," the housing regulator said. "I think the markets would take that very seriously."
DeMarco also warned that any efforts to have Treasury sell off its preferred shares of the government-sponsored enterprises, which have risen significantly in value over the past couple of years, would be damaging to housing finance reform efforts and the market. Sen. David Vitter, R-La., said at the hearing that some hedge funds have been lobbying Congress to encourage such sales.
"I think it would certainly generate confusion and questions in the mortgage market about the role that private capital would have in the future if there was a thought that there was some sort of reconstituting Fannie and Freddie as they have been, with the charters they had," said DeMarco, while noting that he is not aware of any plan to do so.
Focusing on more immediate concerns, Sen. Jon Tester, D-Mont., pressed DeMarco about the agency's new single securitization platform, which the regulator said he hopes to have up and running in five years, and the role community banks will be able to play in the market under the new platform.
DeMarco said that the agency is taking steps that would allow smaller institutions, including community banks and credit unions, to participate, noting that "this is something I care a lot about."
"I think that one of the key things, one of the real building blocks, of what we're going with the platform even started before the platform. And that is with getting data standards and electronic reporting standards in place that would work with the whole market," the regulator said. "Because when you do it just one way, when you develop an industry standard, it's far easier for a community bank to acquire that technology from a vendor and be able to put it in their institution, even if they're a small institution."
The panel also heard from Steve Linick, the FHFA's inspector general.
Linick further reiterated the effect uncertainty is playing within the agency, the GSEs and the market, warning that more clarity on reform is needed.
"There's no doubt that uncertainty is the single most important challenge. I think this has an effect on oversight, which is obviously my role. It affects the agency, the enterprises and from what I've heard the market," said Linick. "On the agency side, it affects the agency's ability to recruit examiners and others and maintain staff and also develop long-term resource allocations. We don't know the fate of the enterprises and that makes it very difficult. The conservatorship was meant to be a time out."
He added: "It also affects morale for the agency. On the enterprise it certainly affects morale for them, and I've heard from the marketplace that without a set of rules people don't want to dip their toe in the water."
Linick also detailed ongoing improvements the agency is trying to make in response to the inspector general's oversight, including with respect to its examinations.
"It's my understanding that the agency has beefed up its examination capacity somewhat. They've got strong leadership, and they have imposed discipline in their examination programs," he said. "But we continue to issue reports that suggest their examination coverage is still lacking and it's unclear whether that's the result of a lack of examiners."
