How FHFA Leadership Change May Impact Yo...

According to the Wall Street Journal and a number of other credible sources, FHFA acting Director Edward DeMarco is on his way out.

DeMarco, appointed by President Obama as acting director in August 2009, has garnered the ire of Democrats in Washington because of his rejection of an Administration plan to create a national mortgage principal forgiveness program. Reports indicate the President may replace him as early as January.

Overall, Mr. DeMarco’s leadership of FHFA has been stellar. He has taken strides to protect taxpayers from the bottomless pit that are Fannie Mae and Freddie Mac, and worked extensively to promote private market solutions to both generate a housing recovery and resolve the Fannie/Freddie crisis. My organization, the Distressed Property Coalition (DPC), worked with FHFA to create a new national short sale program which brought certainty and profit back into the short sale investing market.

When Congress created FHFA, the mandate for the agency was clear: protect taxpayers from additional losses incurred by Fannie and Freddie. Mr. DeMarco’s job is not to create good housing policy, but rather work within this Congressional mandate. Recently, it has led to some issues my group has with FHFA with respect to REO and short sale valuations in certain cities. Inflated valuations are a good thing for taxpayers, but likely very bad housing policy.

Despite continued concerns with policies emanating from Fannie and Freddie, DPC believes Mr. DeMarco is the best answer for investors, because his actions demonstrate his respect for the private market. Judging from the list of potential replacements I have seen, his replacement may not share the same views. Here are my thoughts on the impact on investors if Mr. DeMarco is relieved of his duties at FHFA.

The biggest policy change will obviously be in the realm of principal reduction. There is no chance the Administration will nominate a replacement unless he or she agrees to implement a new government program providing taxpayer money to underwater homeowners.

Introducing a new principal reduction program would be a serious step backwards for the housing market because it would embrace a philosophy that was prevalent post-housing bubble but one that DPC has dampened during the past two years: the notion that despite a massive bubble in the housing market, no one should lose money.

The banks were loaned $700 billion to recover. Fannie and Freddie were given $149 billion that taxpayers will never see again. And now, four years removed, underwater homeowners may be given taxpayer money. It would seem that the government wants to guarantee that the only people who will lose money because of the housing bubble are those who pay taxes. Furthermore, given the past performance of previous government programs, the prospects for success are weak despite alleged noble intentions.

Details of the program are still uncertain, but concern is justified beyond philosophical reasons. Will the program reduce principal for homeowners current on payments? If so, why? Will the program reduce principal for homeowners behind on payments? If so, is there not the chance of simply throwing good money after bad? Also, will the program be another attempt (just as valuation inflation) to engineer an artificial housing recovery?

Beyond the principal reduction program, the news for investors is generally good. I do not believe there will be any attempt to curb the short sale program that we fought so hard to create.

Launched in November, the new program promotes short sale options for distressed borrowers, facilitates the process, and eases prior restrictions for investors. We do have some concerns about the implementation of a new valuation process approved as part of the program, and will continue to work with FHFA and Congress to improve it. The short sale program is DPC’s landmark victory during its first two years in operation and we will see to it that it is fully and properly implemented for the investor community.

We have several other “big ticket” housing policy items that we are taking to Capitol Hill in 2013.

The REO and short sale valuation issue will need to be addressed at FHFA, but given Mr. DeMarco’s current position on the matter we probably are not losing much should he be forced to resign.

Other matters, such as offering an amendment to the Dodd-Frank Act, reforming a variety of GSE policies such as remaining flipping restrictions and some title insurance matters will be handled through the legislative process in Congress and not through FHFA.

While Mr. DeMarco will be missed if he is forced to leave FHFA, the impact on residential investors will likely be minimal primarily because DPC was able to work with him and FHFA for the past two years and address a variety of policy matters important to investors. There is still much work left to be done, and I feel that we have fostered strong enough relationships with Congress to continue to make significant progress regardless of whoever takes the helm at FHFA.