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 Silver Spring in September 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 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 companies subsist on taxpayer support that now totals $190 billion.
But DeMarco says he’s looking beyond the current housing crisis and working toward a day when the government no longer backs most U.S. home loans.
Republicans and Democrats in Congress and President Obama all say they want to wind down and replace Fannie Mae and Freddie Mac, yet they’ve been deadlocked on a solution. That might make DeMarco the only official in Washington actively working to shrink the government-sponsored enterprises.
“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. “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 companies, 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.
“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 the FHFA and now vice chairman of the investment firm WL Ross & Co.
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 focused on Fannie Mae and Freddie Mac for most of his decades-long career. After majoring in economics at Notre Dame and earning a doctorate from the University of Maryland, he began scrutinizing the government-sponsored enterprises in 1986 as a research fellow at what was then called the General Accounting Office.
His conclusion, published in a 1990 report: Fannie and Freddie were operating with little oversight as private companies backed by the implicit understanding that the Treasury Department would rescue them if necessary. The companies needed much closer federal supervision “to keep emerging problems from imposing losses on taxpayers,” the report said. He made similar warnings later that decade, as a Treasury official.
In 2006, he became deputy director at the Office of Federal Housing Oversight, the predecessor to the FHFA. He began running the FHFA in an acting capacity after Lockhart’s departure in 2009. DeMarco remains in the role 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.”
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. Employees say he keeps close counsel with a small circle of advisers.
“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 Treasury. “He’s not a shoot-from-the-hip kind of guy whatsoever. ”
DeMarco’s analytical style has won accolades from Republicans who like his taxpayer-first approach. 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 Sen. Barbara Boxer (D-Calif.), a Democrat who has been pushing the 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 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.”
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.’ ”
The FHFA did make it easier this year for “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, taking out a 15-year loan on the house he and his wife had bought in 1992 in Silver Spring for $230,000. The average rate that month on 15-year mortgages was 4.4 percent.
While public focus is on spurring refinancings, DeMarco has been taking steps to shrink Fannie Mae and Freddie Mac according to a blueprint the FHFA released this year.
The 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.
The 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 steppingstones to coming up with an improved business model for the future,” he said.
Such developments are incremental yet could have a broad impact, whether on the cost of borrowing or changes to state foreclosure laws, according to Boltansky. “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 long-standing refusal to forgive some debt on loans backed by Fannie Mae and Freddie Mac. He says forgiving that debt 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.
Activists emblazoned the words “Fire this Man” on posters below an unflattering close-up of DeMarco, his eyebrows raised and mouth open. And in September, 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.”
DeMarco’s future will remain unclear until after Tuesday’s presidential election. Republican nominee Mitt Romney hasn’t weighed in on the direction of the FHFA.
If Obama wins, there’s a good chance DeMarco will remain in his acting position. Obama would probably want to put his own 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 blow-back.
DeMarco 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.”