Believe it or not, sometimes I’m not cynical enough.
I couldn’t fathom the timing of the Obama plan to replace acting FHFA director Ed DeMarco via a recess appointment. The administration’s complaints about him have been as convincing as the parade of “I don’t know” bank CEOs testifying before Congress. DeMarco serves as the perfect scapegoat for Team Obama’s failed housing policies. It’s not as if there’s any reason to think Obama has gotten religion on the housing front; the most you could expect him to offer is yet another Potemkin borrower relief program that generates a few feel-good stories but does little to address the real problem. And now that the housing market looks to be on the mend, the pressure for have Fannie and Freddie take more aggressive action, meaning by doing principal mods, is considerably alleviated.
DeMarco also has a big fanbase among Republicans, so replacing him with anyone too homeowner-friendly might lead the Republicans to take revenge in some fashion in the budget/debt ceiling talks. So given that the administration has seen fit to let the DeMarco matter fester, why act when it might lead to pushback on other fronts from the constitutionally tetchy opposition (well, faux opposition)?
And lo and behold, the Administration changed course yet again. Per the Wall Street Journal:
While some liberal political groups have pushed for a quick recess appointment that bypasses the need for Senate confirmation, such a move appears highly unlikely for now. One person familiar with the discussions said officials were likely to seek a nominee who would pose few problems gaining Senate confirmation, a sign that a recess appointment isn’t being considered for now.
But then why replace DeMarco at all? He’s that rare beast of a dedicated public servant. Whether you like it or not, he actually believes that he can give borrowers enough relief without principals mods. And no one acceptable to the Republicans is going to be more forgiving on that issue.
Dave Dayen pieced it together. It’s the $200 billion in FHFA putback litigation against the banks. A few days ago, there was a peculiar article in the New York Times, “Mortgage Crisis Presents a New Reckoning to Banks,” peculiar in that it was old news, yet given prominent play. Here’s the relevant part:
Regulators, prosecutors, investors and insurers have filed dozens of new claims against Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and others, related to more than $1 trillion worth of securities backed by residential mortgages.
Estimates of potential costs from these cases vary widely, but some in the banking industry fear they could reach $300 billion if the institutions lose all of the litigation. Depending on the final price tag, the costs could lower profits and slow the economic recovery by weakening the banks’ ability to lend just as the housing market is showing signs of life…
Efforts by the banks to limit their losses could depend on the outcome of one of the highest-stakes lawsuits to date — the $200 billion case that the Federal Housing Finance Agency, which oversees the housing twins Fannie Mae and Freddie Mac, filed against 17 banks last year, claiming that they duped the mortgage finance giants into buying shaky securities.
“Duped”? This construction suggests that the banks enticed the GSEs into buying dreck, when the banks misrepresented their wares. And here’s the real reason for the bank freakout:
Last month, lawyers for some of the nation’s largest banks descended on a federal appeals court in Manhattan to make their case that the agency had waited too long to sue. A favorable ruling could overturn a decision by Judge Denise L. Cote, who is presiding over the litigation and has so far rejected virtually every defense raised by the banks, and would be cheered in bank boardrooms. It could also allow the banks to avoid federal housing regulators’ claims.
Again, you can see the pro-bank spin. “Rejected virtually every defense” implies the judge is biased, as opposed to the banks’ arguments were strained.
But the big issue is that if the banks lose the appeal, they have some big suits staring them in the eye, and the facts don’t appear to be on their side. So the best course of action is to settle. Hence having a much less tough-minded FHFA director would be very attractive. As Dayen observed:
So banks still have this extraordinary exposure from the housing collapse and their fraudulent sale of mortgage-backed securities. And their biggest hurdle comes from the FHFA lawsuit. If it’s successful, it will inform all these other lawsuits and cost banks up to hundreds of billions of dollars. And people think the Obama Administration wants to replace Ed DeMarco over principal reduction?
Compared to the FHFA lawsuit, all the other lawsuits and enforcement actions by the federal regulatory apparatus are pinpricks. That lawsuit opens up the banks to far more exposure. In addition, banks have complained about lending standards for selling loans to Fannie and Freddie in the secondary market, and the due diligence to which they have submitted new loans. A new FHFA Director would have control over all of this, and if the benchmark is “confirmability from Republicans,” I would hardly expect a more aggressive or interventionist policy profile.
So all the caviling about DeMarco was to soften up the left to putting in an more bank-friendly replacement. This is change you can believe in, predictably for the worse.