April 10, 2012

EDWARD J. DEMARCO is an obscure federal bureaucrat, but not as obscure as he probably would like. As acting director of the Federal Housing Finance Agency (FHFA), which oversees mortgage giants Fannie Mae and Freddie Mac while they are in federal conservatorship, Mr. DeMarco has become a scapegoat for populist critics of U.S. housing policy. Whole Web sites are devoted to demanding his ouster. Mr. DeMarco is “the single largest obstacle to meaningful economic recovery,” according to one far-fetched Huffington Post article.

Specifically, he stands accused of preventing Fannie and Freddie from reducing the debts of underwater homeowners, thus compounding the misery of these unlucky borrowers and depressing the housing market. He is under tremendous pressure, from the Obama administration and its allies on Capitol Hill, to change course.

Before the demonization gets totally out of hand, a few facts: Mr. DeMarco is an economist and career civil servant who served 10 years, most of it under President Bill Clinton, as the Treasury Department’s top Fannie and Freddie analyst. Under President George W. Bush, he became the second-ranking official at the predecessor agency to the one he now heads; he was named acting director of FHFA by President Obama in 2009. In short, he is a professional who has served presidents of both parties. Yes, Mr. DeMarco was a leading skeptic of Fannie and Freddie, but after their spectacular collapse in 2008, at the cost to taxpayers, so far, of $190 billion, this would seem to be a point in his favor.

Now Mr. DeMarco is operating under a statutory mandate that requires him both to maximize assistance to troubled homeowners and to minimize taxpayer costs. If members of Congress, or the White House, don’t like the way he’s interpreting those orders, they have an option: Replace the moribund Fannie-Freddie colossus with a more sustainable mortgage finance institution, and give it a fresh set of policy instructions. But it’s easier to blame Mr. DeMarco for the housing market’s problems than to fix them.

There is a genuine policy debate to be had. Some 11 million homeowners currently owe more on their mortgages than the property is worth. Reducing their principal balances could enable them to avoid foreclosure, thus propping up house prices and boosting economic growth. Advocates say Fannie and Freddie could facilitate more such writedowns at practically no cost to taxpayers, because the entities are already on the hook for the risk of default anyway — and because a growing economy reduces that risk.

Mr. DeMarco’s response is that the lunch isn’t quite that free. As he noted Tuesday in a speech at the Brookings Institution, 75 percent of Fan-Fred’s deeply underwater borrowers are current on their loans. A broad principal reduction offer could induce many of them to default on purpose. That, in turn, could offset the benefits, both to the economy and Fan-Fred. FHFA is considering additional aid, including selective writedowns, but he said it’s unrealistic to expect dramatic results.

As for homeowner suffering, Mr. DeMarco appropriately called attention to “people working multiple jobs, or cutting back on the family budget in many ways, to continue making their mortgage payments through these tough times.” Mr. DeMarco clearly sees himself as speaking for this silent majority, and he deserves to be heard.