(Originally published here.)
Two years ago, the Federal Housing Finance Agency sued 18 banks for losses on $200 billion in private-label mortgage bonds purchased by Fannie Mae and Freddie Mac. That strategy is now paying off. JPMorgan Chase & Co. is negotiating a $13 billion settlement with the U.S. government that would feature a $4 billion payment to the FHFA. Today, Bloomberg News reports that Bank of America Corp. might pay the FHFA at least $6 billion for dodgy bonds issued before the crisis.
While reasonable people can debate whether the fines are big enough to deter future wrongdoing, as well as the relative merits of targeting companies versus individuals, it’s clear that the FHFA deserves praise for at least trying to hold the banks to account for their bad conduct. Its doggedness stands in marked contrast to the passivity of the Department of Justice, which has expressed reluctance at enforcing the rule of law when large financial institutions are involved. Much of the credit for the FHFA’s aggression has to go to Ed DeMarco, the career civil servant who has been leading the agency as its acting director for more than four years.
Liberal commentators such as Felix Salmon and Paul Krugman have lambasted DeMarco for his unwillingness to write down mortgage balances for underwater loans owned by Fannie and Freddie, even going so far as to demand that President Barack Obama fire him. (Bloomberg View’s editors have been more measured in their criticism, but agree that the FHFA has been making mistakes.) These criticisms miss the mark. For one thing, as Dave Dayen has noted, JPMorgan’s proposed deal with the government — which might not have happened without DeMarco — would actually help troubled borrowers more than twice as much as anything anyone wants the FHFA to do.
More importantly, DeMarco’s dedication to pursuing possible wrongdoing could help lay the groundwork for a more robust housing market. Almost every new mortgage originated since the crisis is either guaranteed or owned by the government. Investors aren’t willing to risk their own capital because they were burned so badly by widespread fraud last time around. I doubt that DeMarco’s modest actions will be enough to change that, but at least he has been doing what he can to advance the best interests of savers and taxpayers. Can the same be said for Mel Watt, Obama’s nominee to replace DeMarco, the Congressman from Bank of America’s hometown and a major recipient of financial industry contributions?
(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter.)