March 5, 2007, James B. Lockhart III, in his capacity as the director of the Office for Federal Housing Enterprise Oversight (OFHEO),[/b] gave a speech before the America's Community Bankers Government Affairs Conference in Washington, D.C. In his presentation, Lockhart made the following comment about the role of the government-sponsored enterprises (GSEs) within the housing market and the general economy. ‘With the numerous privileges associated with the GSE charter come important responsibilities,’ said Lockhart. ‘Among those is the duty to play leadership roles in developing innovative solutions to difficult issues, such as those we face today with subprime mortgages and nontraditional mortgage products. Within the limitations and requirements of their respective charters, the housing GSEs each have a responsibility to be thoughtful and active participants in developing sound standards and guidelines in these segments of the market.’ In looking back at that speech, I have to wonder: What GSEs was Lockhart talking about? And in his role as the federal regulator for the GSEs, what exactly was he doing to see that the GSEs were meeting such lofty goals? Sadly, we know the answers to those questions. Last week, Lockhart announced that he was stepping down as the head of the Federal Housing Finance Agency (FHFA), the entity that assumed GSE regulatory control from the now-defunct OFHEO. As a player in the current economic crisis, Lockhart has a degree of responsibility for what transpired. Why was Lockhart at the OFHEO/FHFA helm? Almost every report on Lockhart inevitably turns up his very close ties to George W. Bush. The two men were friends for most of their lives – they attended the same prep school, college and graduate school. Lockhart was the executive director of the Pension Benefit Guaranty Corp. during the George H.W. Bush administration, and he served as the deputy commissioner and chief operating officer of the Social Security Administration in George W. Bush's administration before taking charge at OFHEO in 2006. But it never appeared that Lockhart was truly in control of his OFHEO position. This is not to say that he was a passive observer to Fannie and Freddie's antics – he often spoke out about the excesses of their operations and the need for stronger regulatory control. In April 2008, Lockhart stated in OFHEO's report to Congress that the GSEs posed ‘a significant supervisory concern’ and called for ‘comprehensive GSE reform legislation.’ However, OFHEO was something of a paper tiger, and Lockhart never had the clout to convince Congress to give OFHEO the teeth and muscle needed to provide proper regulatory authority. Oddly enough, his longtime friendship with President Bush was no help, as the White House allowed the GSEs to run amok despite Lockhart's calling for more OFHEO authority to keep Fannie and Freddie in line. Last September, the GSEs were so weak that the federal government had no choice but to take them over. Nearly a year later, the GSEs are completely under the Treasury Department's control and have been kept alive with trillions of dollars in federal financial infusions. And let's not forget that FHFA is also the regulatory agency for the Federal Home Loan Banks, and that system is having its share of hiccups and shivers. It would not be fair to blame Lockhart solely for the fiasco that befell Fannie and Freddie – a great deal of the blame can be placed on members of Congress, who ignored Lockhart's pleas while enjoying handsome campaign donations from the GSEs. However, the collapse occurred on Lockhart's watch, and ultimately, he will carry much of the criticism for being at the wheel during this period. Lockhart is leaving FHFA at a time when the fate of Fannie and Freddie is still not clear. The Obama administration is floating a ‘bad bank’ idea of removing the billions of dollars in troubled loans from the GSEs and depositing them into a new entity. Other ideas have been floating around for months, ranging from total privatization to consolidation of the two GSEs into a single unit to sell off parts of the GSEs while retaining other parts as federal agencies. At this stage, no one knows where the story will end. But the GSEs are going to need a more vigorous brand of regulation to ensure their future stability. Lockhart's departure gives us the opportunity to hope for a replacement who is more successful in steering the GSEs to where they need to be, rather than letting the GSEs call the shots while standing by with no control over the volatile situation. What is your view on Lockhart's OFHEO/FHFA legacy? Feel free to e-mail me or leave your comments on this page – I am interested in hearing what the members of the industry think about this. – Phil Hall, editor, [b][i]Secondary Marketing Executive[/i][/b]. [i] (Please address all comments regarding this opinion column to hallp@sme-online.co
