BLOG VIEW: The recent news that the Federal Housing Finance Agency (FHFA) is suing 17 financial institutions in regard to their securitization procedures prior to the 2008 financial crisis represents a new low in hypocrisy. Quite frankly, I think it is time that this badly managed excuse for an agency gets a top-to-bottom overhaul.
The FHFA is the successor to the Office of Federal Housing Enterprise Oversight (OFHEO), which served as regulator of the government-sponsored enterprises (GSEs). We all know how well that worked out. Even by the standards of federal incompetence, the OFHEO stood out as being the least-effective regulatory body in charge of the financial services industry. The disastrous crash of Fannie Mae and Freddie Mac in September 2008 can be blamed on the OFHEO's utter inability to do its job correctly.
The FHFA has not been an improvement. For starters, the agency has been operating without a full-time director since August 2009 – Edward J. DeMarco has been the ‘acting director,’ because the White House has been incapable of finding anyone to take on the directorship. North Carolina Commissioner of the Banks Joseph A. Smith Jr. was nominated for the job in November 2010 (less than two months before the Democrat-controlled 111th Congress was set to expire), but he never received Senate confirmation and withdrew his candidacy two months after he was put forward for consideration.
DeMarco's stewardship can charitably be described as a mess. In April, we reported that the FHFA paid the heads of Fannie Mae and Freddie Mac a total of $17.1 million during the past two years, while the top six executives at the GSEs were paid a total of $35.4 million during the same period. President Obama, in comparison, has an annual salary of $400,000.
Even worse, DeMarco has insisted on using taxpayer money to cover the legal bills of the GSE executives who drove their respective agencies into ruin. In January, Rep. Randy Neugebauer, R-Texas, chairman of the oversight subcommittee of the House Financial Services Committee, alerted the public that the FHFA was shelling out $410.7 million on legal expenses incurred by Fannie Mae and Freddie Mac since they were put into conservatorship – including $162.4 million spent on securities-related lawsuits and indemnification agreements for former executives of Fannie Mae and Freddie Mac. That ugly sum is probably much higher by now – but don't expect DeMarco to be forthcoming in detailing how much taxpayer money is going to the FHFA's lawyers.
The GSEs and their clueless regulator have a lot of explaining to do on other matters. I would also like to recall another story from earlier this year: In April, political activist and former presidential candidate Ralph Nader sent a letter to Treasury Department Inspector General Eric Thorson and the chairmen of the Senate Committee on Banking and the House Financial Services Committee, seeking answers regarding one of DeMarco's most disastrous decisions: the June 16, 2010, order to delist the GSEs' common and preferred stock from the New York Stock Exchange, even though the exchange never requested the FHFA to proceed with this action.
‘The delisting took the shares down to the range of 30 cents, wiped out billions of dollars in shareholder value and chased away many institutional holders,’ Nader wrote. ‘DeMarco's action in delisting Fannie Mae and Freddie Mac do not seem to comport with his understanding of the statutory purpose of the conservatorship. Fannie and Freddie common shareholders should not be vanquished, but given a chance to recover some of the value of their stock, just as the Citibank shareholders were allowed to participate in the recovery of Citibank stock. Investors of a variety of stripes, in part because of the reassuring statements made by high-ranking government officials, relied on the government to backstop their investments in GSE stock.’
Nader also noted that under DeMarco's reign, Fannie Mae and Freddie Mac common-stock owners are prevented from ‘filing suit against the GSE managers for making false or misleading statements concerning the financial condition of the GSEs.’
Last month, the FHFA's Office of Inspector General (OIG) found that the agency was too lax in its review of the GSEs' agreements with the U.S. Treasury Department to administer the Home Affordable Modification Program. The OIG's report said the FHFA failed to review the substance of the financial agency agreements prior to their finalization in early 2009. The GSEs' conservator only reviewed the documents to ensure the GSEs were legally allowed to enter into the agreements.
As for the new lawsuit targeting 17 financial institutions, I believe that columnist Dan Caplinger of The Motley Fool website said it best: ‘For the FHFA – and by extension, the federal government in general – to lay all the blame for Fannie's and Freddie's excesses on big banks is both disingenuous and shortsighted. In particular, it fails to recognize just how much the government agencies profited from the housing boom – at least until the house of cards came blowing down.’
Of course, there is the proverbial 800-pound gorilla swinging around in the FHFA headquarters. Since the Obama administration began operations in January 2009, it has never offered any game plan on ending the state of GSE conservatorship. The Republican-controlled House of Representatives has also failed to produce a be-all/end-all solution. DeMarco, not surprisingly, is also without an answer to the puzzle.
As noted in last week's special report on MortgageOrb, ‘The Fall and Rise of the Housing Market,’ this sorry situation raised the ire of a former GSE executive.
‘If, three years ago, someone said, 'Three years from now, [the GSEs] will still be in conservatorship,' I would be incredulous,’ says Edward Pinto, resident fellow with the American Enterprise Institute in Washington, D.C., and a former executive vice president, chief credit officer and senior vice president of marketing and product management at Fannie Mae. ‘Their conservatorship has no deadline – it could go five years or eight years. Once it is gone past three years, why not? What is there to stop it from being a perpetual conservatorship?’
A perpetual conservatorship is bad enough, but perpetual incompetence is even worse – and this new round of litigation will soak up millions more in taxpayer money without improving the stagnant economy or putting one person back to work. The FHFA is a catastrophe – the government either needs to quickly come up with a new answer to GSE regulatory oversight, or the FHFA needs a more capable leader at the helm. The current environment is totally unacceptable.
– Phil Hall, editor, Secondary Marketing Executive
(Please address all comments regarding this opinion column to hallp@sme-online.com.)
