When North Carolina banking commissioner Joseph Smith's nomination to head the Federal Housing Finance Agency (FHFA) passed out of committee early last week, I thought it was a done deal. Not so much anymore. While his credentials seemed fit for the job, and his support widespread throughout the industry, his timing may be his downfall.
As we've discussed here on the blog, there is currently quite the fight going on between the Administration, specifically the FHA, and the FHFA, which is the regulator for Fannie Mae and Freddie Mac under conservatorship.
The FHA wants the two mortgage giants to participate in its "short refinance" program. This program is for current, performing loans that are "underwater," or where the value of the mortgage is larger than the home is worth. It requires voluntary principal write-down of at least 10 percent by the lender/servicer, among many many other qualifications, in return for a new FHA insured loan. The FHFA has resisted, under the leadership of current acting director Edward DeMarco.
Just after Smith's nomination passed out of the Senate Banking Committee, Ranking Member Richard Shelby (R-AL) put out a rather scathing statement, "Mr. Smith is not the best candidate for this job."
Smith has not given his opinion on the FHA program specifically, only saying in written testimony that "protecting taxpayers" is his primary driver when considering any programs.
It may be his waffling on the subject that has Republicans so concerned, as they don't want to force the banks or Fannie and Freddie into any more losses. Ironically, it was Senate Banking Committee folks who initially pushed for Acting Director DeMarco's replacement. This after DeMarco sent subpoenas to 64 banks and servicers regarding potential fraud in mortgage backed securities.
Now Republicans claim Smith doesn't have the experience to oversee the GSE's. "The first confirmed Director must hit the ground running equipped with the skills and experience needed to be a strong regulator free from influence by the current Administration," wrote Shelby in a statement. "In other words, we need a watchdog not a lapdog." That last part suggests they don't think he's willing to stand up to the Administration and reject Fannie and Freddie's participation in the FHA program.
The vote on Smith's nomination was supposed to happen before the end of the session, but sources tell CNBC it's unlikely given the growing opposition. I called over to FHA commissioner David Stevens, who has been vocal until now about the GSE's needing to participate in the short refi program, but he declined comment about Smith's nomination.
It seems abundantly clear that while the Treasury Secretary says there is "a good economic case" for the GSE's to write down principal, and while FHA commissioner Stevens says their current refusal to do so is, "short-sighted," the pendulum in Washington is swinging away from more help for housing.
In a note to investors, Jaret Seiberg of MF Global's Washington Research Group, writes, "We read the House decision on Friday on the TARP bill [insufficient support to use TARP funds to pay for legal assistance for troubled borrowers facing foreclosure or short sales] and the confirmation troubles for Smith as confirming our view that the politics have turned against troubled borrowers despite the robo-signing controversy."
Even as home prices take another step down and foreclosures begin to mount again, the prevailing opinion, on Capitol Hill at least, is that housing is recovering on its own, and the worst is behind us. Taxpayers shouldn't have to pay any more to keep some troubled borrowers in their homes.
As for the FHA "short refi," principal write-down never flew during the worst of the crisis, and it's unlikely that a voluntary program, offering small incentives to servicers, will make much headway in an improving environment, not to mention the fact that very few borrowers qualify for it anyway.
Fannie and Freddie are looking at a market where most performing loans will likely continue to perform, whether they're underwater or not, and therefore taking a loss now against a possible loss later, isn't exactly enticing.