WASHINGTON ( TheStreet) -- One reason for skepticism about President Obama's latest housing plan unveiled yesterday in Las Vegas lies with the feckless agency charged with administering it.The little-known Federal Housing Finance Agency has a history of laxity and ineptitude in overseeing Fannie Mae and Freddie Mac since its 2008 inception. The agency was created to beef up oversight of the undercapitalized mortgage giants at the beginning of the financial crisis. A month later, it stepped in to place them under conservatorship as the Treasury Department started to pump in $140 billion in bailout money. A series of internal audits have documented FHFA's repeated failures as regulator of the two mortgage resellers, which themselves have missed a series of red flags about foreclosure abuses. FHFA snoozed through numerous reports that law firms in Florida and elsewhere were "robo-signing" inaccurate foreclosure documents, hiding the mistakes from courts, and improperly charging borrowers, the agency inspector general reported last month. The agency also ignored hundreds of consumer complaints of foreclosure fraud and abuse, including some that ultimately led to criminal charges against a mortgage lender. In 2010, the agency let Freddie Mac settle for only $1.35 billion with Bank of America ( BAC) over mortgage repurchase claims. FHFA disregarded a senior examiner's warnings that Freddie might be leaving billions on the table that could be recovered for taxpayers, the inspector general reported. Obama's modest plan for troubled homeowners seeks to spur mortgage refinancing so borrowers who owe more than their homes are worth can take advantage of lower interest rates of around 4%. The revamped Home Affordable Refinance Program, which reached fewer than 1 million borrowers, aims to reduce chances for default and leave homeowners with more money to spend. To qualify, borrowers must have a loan owned or guaranteed by Fannie or Freddie that was taken out before June 1, 2009. Their accounts need to be current, with no late payments during the past six months and no more than one late payment during the past 12 months. Borrowers will be eligible no matter how far their home value has plunged, eliminating the original 125% loan-to-value limit. The new program is intended to reach only a small fraction of borrowers stuck with plummeting home values.
Between 1 million and 3 million borrowers will be able to refinance under the revamp, out of 11 million to 14 million who are underwater, analysts estimate. The new plan represents a compromise by FHFA, which had resisted White House refinancing efforts on grounds they could lead to widening losses for Fannie and Freddie, and ultimately taxpayers. The agency yielded, agreeing to encourage banks' participation by relaxing their liability for defaulted loans with underwriting flaws. Lawrence Summers, Obama's former top economic adviser, vented some of the White House frustration with FHFA in a Washington Post op-ed yesterday. The agency "has taken a narrow view of the public interest," Summers wrote. "The FHFA's focus has been on reversing previous policies, heedless of changes in the environment and treating mortgage finance as a morality play." These policy differences between the White House and FHFA may play out as the new program unfolds and decisions have to be reached on possible mid-course corrections. Details of the revamp are to be released in mid-November, and borrowers can enroll early next year. While policy differences underlie some questions about FHFA implementation, the agency faces deeper, more intractable issues that undercut its effectiveness for the foreseeable future. One problem is lack of leadership. The FHFA has been headed by an interim director, career civil servant Edward DeMarco, since August 2009. Obama's nominee for permanent agency chief, North Carolina banking regulator Joseph Smith, withdrew last year in the face of filibuster threats by Senate Republicans led by Richard Shelby of Alabama. Senate Republicans have blocked a number of Obama appointments to key regulatory posts. DeMarco's resistance to expanded homeowner aid fueled a push by House Democrats for another try at a permanent director appointment. "There are a lot of people who need a lot of help, and they need it fast," Rep. Elijah Cummings (D-Md.) told the Wall Street Journal earlier this month. FHFA also lacks the resources to police the woefully run Fannie and Freddie enterprises, according to the agency inspector general. Only a third of the agency's 120 non-executive examiners are accredited, leading it to cut corners and delay reviews of the enterprises that guarantee half of all mortgages in the United States.
Little help is on the way. "Significant examination capacity shortfalls will likely remain," the FHFA inspector general reported last month. This leaves the hapless DeMarco with little authority and few resources as he tries to oversee the new Obama housing program. He is trapped powerless in the partisan stalemate over a broader policy issue: What to do with Fannie and Freddie? When the administration stepped in to aid the mortgage companies in 2008, it was described as a "time-out" to let policymakers restructure housing finance. Yet administration bills to privatize the mammoth enterprises have gotten nowhere in Congress. DeMarco reflected on the future of Fannie and Freddie in a speech last month. "The model on which they were built is broken beyond repair," he said. "Yet after three years, there still is no clear direction as to what legal and institutional structures will replace the enterprises and their central position in the housing finance market." -- Written by Neil Roland in Washington.
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