Ever since the collapse of the housing bubble, local officials around the country have had to deal with a massive problem of homes effectively abandoned by banks and other absentee owners.
With the direct and indirect costs of this neglect running into the billions of dollars, scores of cities and towns have passed laws calling on lenders or mortgage holders to pay a fee for maintaining the properties they have taken steps to reclaim. Now, as Chicago has learned, such efforts face an unexpected threat from an arm of the United States government – the little-known Federal Housing Finance Agency, or FHFA.
In Chicago, banks had been walking away from the foreclosure process after deciding that it might not generate enough money to justify the expense of maintenance. The city council responded with an ordinance requiring mortgage holders to maintain homes before taking ownership of them. The council had carefully crafted its rule to answer the criticisms of a group of major banks, but the FHFA objected.
As the overseer of government-backed mortgage firms Fannie Mae and Freddie Mac (known as the GSEs), it filed a lawsuit characterizing the maintenance fees as an illegal tax. In September, a federal judge upheld that claim, letting Fannie and Freddie off the hook for maintaining vacant Chicago homes with GSE-backed mortgages.
This lawsuit brings back bad memories. In the pre-meltdown years, Washington's financial watchdogs had become so thoroughly captured by Wall Street that, on top of their own failure to act against deceptive and predatory lending practices, some of them sought to block state and local consumer-protection efforts. Most of these regulators have learned some lessons since then. But apparently not the FHFA.
The FHFA was created in 2008 expressly to regulate Fannie and Freddie. Its clout expanded dramatically with the government takeover of those entities the following year. As the owners or guarantors of (at last count) about two-thirds of the nation's home mortgages, Fannie and Freddie have a huge potential role to play in facilitating loan modifications that could work out to the mutual benefit of homeowners and lenders or securities-holders.
Unfortunately, the FHFA has an acting director, Edward DeMarco, who seems to be less concerned about endangered families and neighborhoods, the threat to economic recovery posed by a depressed housing market or corporate accountability than about the supposed dangers of renegotiating mortagage amounts – even with the bubble-inflated and deceptive mortgages that were common in the years leading up to the meltdown.
Under DeMarco, the FHFA has gone so far as to block short sales that would allow borrowers to hold on to their own homes, even when the current homeowner or someone willing to sell to them submits the highest bid. Short sales of this kind can be a "win-win for both sides – more money for the mortgage lender and a family that saves their home," Sen. Elizabeth Warren, D-Mass., wrote after one egregious case of this kind in Massachusetts. "But the FHFA flatly refuses these deals. The agency's so-called 'arm's-length' policy means that it will instead demand that the family be moved out and the home be sold at a lower-priced foreclosure sale."
DeMarco was also behind his agency's resistance to a Treasury Department request to provide debt relief, with Treasury paying most of the cost. DeMarco explained that he was concerned about the burden on taxpayers. His analysis was disputed by a number of experts including the economist and New York Times columnist Paul Krugman; in any case, Krugman added, "deciding whether debt relief is a good policy for the nation as a whole is not DeMarco's job … If the Secretary of the Treasury, acting on behalf of the president, believes that it is in the national interest to spend some taxpayer funds on debt relief … the agency's director has no business deciding on his own that he prefers not to act."
With better leadership, the FHFA could be a powerful force for good, bolstering efforts to prevent foreclosuresand stabilize the housing market and the wider economy. And this week, the Senate will be in a position to give the agency that better leadership, by confirming Rep. Mel Watt of North Carolina as FHFA Director.
A real estate and business lawyer before he went into politics, Watt was one of the first members of Congress to decry the predatory mortgage lending practices that fueled the subprime mortgage boom. Over the span of two decades in the House, Watt has been a housing-policy leader, working with members on both sides of the aisle. He has won endorsements from both Republican Sen. Richard Burr of Alabama and Warren; his many other backers include National Commission on Fiscal Responsibility and Reform Chair Erskine Bowles; former Bank of America chairman and CEO High McColl; National Association of Realtors President Gary Thomas and National Association of Home Builders Chairman Rick Judson. The nomination's backers also include Consumers Union, the NAACP and the AFL-CIO.
On the other side, some opponents of this nomination are making the absurd claim that Watt is not qualified. Maybe what they are really concerned about is his strong record of standing up to predatory lending when Wall Street was peddling it hard.
Dory Rand is the president of the Woodstock Institute, a research and policy nonprofit focused on fair lending, wealth creation, and financial systems reform.