Why FHFA's Ed DeMarco Isn't Going Anywhere

Rep. Mel Watt could face some serious pushback in his confirmation hearings.

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Federal Housing Finance Agency Acting Director Edward DeMarco, right, testifies before the Senate Banking Committee in 2010.

If confirmed by the Senate, Rep. Mel Watt, D-N.C., will replace Ed DeMarco, the current – and controversial – acting director of the Federal Housing Finance Agency. While Democrats have been calling for DeMarco's head for years as he has pushed back on more extreme housing remedies, Republicans have quietly supported DeMarco's decisions.

[BROWSE: Obama Taps Rep. Mel Watt to head Fannie, Freddie Regulator]

But the president's pick portends big changes in housing policy. After all, the FHFA is the main federal regulator overseeing housing policy, and whoever runs it will have a major impact on home ownership, mortgage lending, and the future of Fannie Mae and Freddie Mac, the two mortgage giants in federal conservatorship.

But for all the fanfare surrounding the nomination of Watt, there's one small matter standing in the way. Though DeMarco is a holdover from the Bush administration, the current political climate in Congress means he isn't going anywhere anytime soon.

That's because nominees for FHFA Director must be confirmed by the Senate. In years past, Congress routinely ratified the President's choices. No longer. Nowadays Senate confirmations are the political equivalent of a reality TV show, in which lawmakers preen for the cameras, fight among themselves and nominees are subjected to a merciless and microscopic scrutiny of their personal lives.

[READ: Fannie Mae, Freddie Mac Are Set to Pay Taxpayers Back]

But the White House isn't exactly immune to politics, either. President Obama has taken a lot of flack for not doing enough for underwater homeowners and lacking diversity in his second-term Cabinet picks. Installing Watt, who is a minority and supports principal reduction, could help quiet such criticisms.

This isn't the president's first attempt nominating a replacement for DeMarco. At the end of 2010, he picked Joseph Smith, Jr., then the North Carolina Commissioner of Banks. But Smith was forced to withdraw his nomination in January 2011 after Sen. Richard Shelby, R-Ala., then ranking member of the Senate Banking Committee, said he and his party would vigorously oppose Smith's confirmation.

Likewise, Watt's confirmation hearings are expected to be an uphill battle, particularly because he vigorously supports principal reduction, which essentially wipes away part of an existing mortgage so that the homeowner is no long underwater. Supporters of the policy argue that principal reduction reduces defaults and saves taxpayers money. But Republicans have made it very clear that they will never back principal reduction, saying it's akin to bailing out irresponsible homeowners and increasing the government's debts.

The sharp divide between Democrats and Republicans on the future of housing policy makes it a very real possibility that DeMarco will retain his post, no matter what his boss – President Obama – wants.

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The prickly issue of principal reduction aside, DeMarco has actually been a steady hand at FHFA. Under his guidance, government mortgage giants Fannie Mae and Freddie Mac have gotten their financial house in order and are now posting pretty heady profits. The agency has begun to shrink the government's footprint in the mortgage market and slowly, private lenders are starting to see some light at the end of the tunnel.

President Obama is DeMarco's boss, and should be allowed to replace him with a director that will reflect his policies. But the now habitual abuse of the filibuster means senate Republicans can block Watt's nomination. Barring an unexpected outbreak of comity in the Senate, DeMarco, the Bush holdover, could stay in place over the rest of Obama's second term.

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