North Carolina Democratic Congressman Melvin Watt has a dream job: running a federal agency that controls around $5 trillion in financial assets. For now, he’ll have to keep dreaming about it. On October 31, the Senate, by a 57-41 margin, fell three votes shy of the 60 votes needed to invoke cloture (i.e., end debate) over President Obama’s nomination of Watt as director of the Federal Housing Finance Agency, which for over five years has been conservator for mortgage giants Fannie Mae and Freddie Mac. Republicans, with two exceptions, voted to filibuster, believing he wasn’t qualified to run the agency. Yet the main problem with Watt is less his qualifications than his view that FHFA should be a permanent agency, and one with favoritism toward nonwhites.
The upside of the vote: Edward DeMarco will remain in charge of the agency for at least a little longer. National Legal and Policy Center this past June explained in detail why Melvin Watt, an eleven-term member of the House of Representatives from the Charlotte area, would make for a poor choice as overseer of Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”), each a congressionally-chartered Government-Sponsored Enterprise (GSE). To understand why, it helps to know something about the circumstances that led to Fannie and Freddie Mac to be placed under Federal Housing Finance Agency control. Congress created FHFA in late July 2008 as the regulator of these two publicly-traded companies (plus the thrift industry’s 12 Federal Home Loan Banks), part of the Housing and Economic Recovery Act, which President Bush quickly signed. As the new overseer of Fannie/Freddie, succeeding the U.S. Department of Housing and Urban Development’s Office of Federal Housing Enterprise Oversight, it inherited an unenviable situation. The mortgage industry had become severely undercapitalized. Mortgage defaults and foreclosures were beginning to pile up. And house prices, at least in certain local markets, were sharply falling. This wasn’t simply the low point of a standard business cycle. Something else was at work. And that something was the fallout from a credit binge heavily fueled by increasingly stringent federal mandates to boost loan volumes to “underserved” populations. “Underserved” was a nice way of saying “high-risk,” especially if black or Hispanic. Greatly adding to the problem was Fannie Mae and Freddie Mac’s aggressive marketing and sale of mortgage-backed securities to investors on Wall Street and elsewhere.
The situation would deteriorate further in the ensuing weeks. In early September 2008, with Bear Stearns having become history months earlier and Lehman Brothers and Merrill Lynch on the verge of following suit, FHFA Director James Lockhart, with the full backing of Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, placed Fannie Mae and Freddie Mac under federal conservatorship. FHFA no longer was these companies’ regulator; it now was their de facto CEO. And a massive infusion of emergency Treasury Department loans, potentially in the hundreds of billions of dollars, was now in the works. Not just the GSEs, but the credit rating of the U.S. government, hung in the balance. Lockhart left FHFA in late summer 2009 to pursue a career in the financial industry. His replacement was the agency’s chief operating officer, Edward DeMarco. A highly competent career civil servant, DeMarco, whose title was acting director, recognized that the prime purpose of conservatorship was to satisfy Fannie Mae and Freddie Mac’s debt and move them back to independence as quickly as possible. This goal could be derailed, however, if Fannie Mae and Freddie Mac were to grant forbearance to large numbers of deadbeat borrowers, many of whom hadn’t made a single mortgage payment in at least a half-year. Such action would put bondholders, large and small, at a heightened risk of default.
Unfortunately, economic common sense of this sort didn’t make Ed DeMarco a popular man in Washington. He was sorely lacking in “compassion,” said his manifold critics, who have ranged from Sen. Elizabeth Warren (D-Mass.) to California Democratic Attorney General Kamala Harris to the radical website Change.org. The phrase “Dump DeMarco” was reaching a crescendo early this year. DeMarco’s nonpartisan approach to oversight might not be popular, but it has been effective. His oversight, coupled with a revival of the housing market, explain why the bailout is proving far less expensive than originally anticipated. Several years ago the Congressional Budget Office projected the combined long-range taxpayer subsidy of Fannie Mae and Freddie Mac to be $389 billion. Happily, the outlay was only about $187.5 billion. And this figure becomes far lower when one factors in the $146 billion in dividends that the two corporations, as required, have forwarded to the U.S. Treasury. In other words, combined net outstanding debt currently stands at a little over $40 billion. And even that will get a lot lower by the end of the year. Fannie Mae and Freddie Mac announced yesterday, in conjunction with the release of Third Quarter 2013 figures, that they plan to send the government another $39 billion in dividends in December. The debt virtually paid at that point, business should remain brisk. Currently, the companies either own or guarantee more than half the value of the nation’s home mortgages in force.
Progress on this front has put President Obama in a conundrum. On one hand, he wanted to be responsive to his natural allies on the egalitarian Left and replace DeMarco. On the other hand, even Obama recognizes, however reluctantly, that if someone is doing his job, he should be allowed to finish it. In the end, however, the president yielded to activist pressure, announcing on May 1 that the Federal Housing Finance Agency would get a new director in Melvin Watt. In Watt, the president hardly could have made a worse choice. Now 68, the North Carolina lawmaker, a member of the House Financial Services Committee and the Congressional Black Caucus, is an ideal example of civil rights activism: He thinks in terms of the impact of policy on black America first and America as a whole second. This explains the seeming contradiction of Rep. Watt’s acceptance of sizable political donations from the very financial community he denounces. He supported their preferred legislation (most of all, the 1999 repeal of the Glass-Steagall Act’s banking-investment firewall) because he believed more blacks, regardless of creditworthiness, would reap the rewards. Now that he must face the consequences of his advocacy, the lenders get to wear the black hats. During his political career he accepted more than $365,000 in combined campaign donations from commercial banks, a figure not even including contributions from other types of intermediaries. Mel Watt might not like these people, but, hey, he’ll take their money.
Even more problematic has been Watt’s history of making overheated racially-based accusations rivaling anything uttered by Jesse Jackson or Al Sharpton. In October 2005, during a hearing convened by the National Commission on the Voting Rights Act, he stated: “There would be a substantial majority of white voters who would say that under no circumstances would they vote for an African-American candidate.” Such voters, he emphasized, “need to be factored out of the equation” because “I’ve got no use for them.” Against all evidence to the contrary, he added that black voters, unlike white voters, don’t have “an absolute commitment” to race-based voting. The previous year, in 2004, he allegedly demanded that Ralph Nader, himself a man of the Left, drop out of the presidential race as a Green Party candidate and formally endorse Democrat John Kerry. When Nader refused, Watt told him: “You’re just another arrogant white man – telling us what we can do – it’s all about your ego – another fucking arrogant white man.”
The White House, along with civil rights and housing groups, spent the ensuing months lobbying for Watt, turning up the heat during the last week of October. A number of Republican senators expressed objections to Watt, though carefully sidestepping his history of inflammatory racial identity politics. The job of FHFA director should belong to a housing finance expert, not a career politician, they argued. In a floor speech preceding the vote, Sen. John McCain, R-Ariz., remarked that Watt’s lack of financial industry experience reminded him of the sort of “extraordinary circumstance” he experienced back in 2005 when he helped defuse a showdown over certain nominees of President Bush. The lack of GOP confidence in Watt grew to the point where the prospect of a filibuster was real. The procedural vote of Thursday, October 31, an unwelcome Halloween surprise for the congressman, showed just how real. While Democratic senators had a simple majority needed for approval, they didn’t have the 60 votes needed to invoke cloture. The tally was 57-41. All opposed were Republicans. The 57 supporters included 53 Democrats, plus Republicans Richard Burr (N.C.) and Rob Portman (Ohio), and Independents Angus King (Maine), and Bernie Sanders (Vt.). At the end of the roll call, Senate Majority Leader Harry Reid, D-Nev., changed his “yes” vote to “no” as a purely procedural maneuver; this would make it easier in the future to call for another floor vote. Thus, the formal outcome was 56-42. After the vote, Republican leaders once again focused on the issue of expertise. Sen. Bob Corker, R-Tenn., said: “I hope the president will nominate a qualified technocrat with the expertise to play a constructive role in winding down Fannie and Freddie and modernizing our housing finance system.”
Harry Reid, Vice President Joe Biden and their fellow Democrats have a very different view. Adding to their bitterness is that it wasn’t just Watt who was rejected. In a procedural vote that day on President Obama’s nomination of Patricia Millett for the U.S. Court of Appeals for the District of Columbia Circuit, the Senate fell five votes short of the 60 needed to block a GOP filibuster. Reid issued a strongly-worded statement indicating he would sponsor votes on both nominations in the “very near future.” Moreover, he stated, he might engineer a move to require only a simple majority as the minimum threshold for blocking party-line filibusters. Such a measure would not lack for backers among Democratic party-friendly interest groups. The administration is on board. White House press secretary Jay Carney remarked after the vote that it is “enormously disappointing that Republicans would filibuster” Watt’s nomination. “We know he’s qualified, and we know he would do a good job,” said Carney. “And there’s a heck of a lot of important work that needs to be done in that agency.” As if President Obama was planning to drop Watt’s nomination, Carney replied, “Absolutely not.”
Republicans are right to oppose Watt as the new director of the Federal Housing Finance Agency. But they’re playing a weak hand when they focus on his alleged lack of experience. Rep. Watt, in fact, is a lawyer, and one with extensive experience in the very issues that FHFA deals with every day. And he gained a lot of that expertise as a sitting member of the House Financial Services Committee, where he is now the fourth-ranking Democrat. The leading Democrat on the committee, Rep. Maxine Waters, D-Calif., no stranger to racial identity politics herself, also denounced the Senate Republican opposition. “Mel (Watt) has over four decades of experience on issues related to housing and housing finance,” Waters said after the vote. “Blocking the nomination of someone as qualified as Mel Watt has deprived the FHFA of a strong leader who is much needed to confront the challenges that lie ahead.” Opponents of Watt should avoid entangling themselves in battles over his formal qualifications. If it’s expertise they want over at FHFA, they already have it in the form of Ed DeMarco. Indeed, given DeMarco’s performance over his four years in office, it is hard to think of anyone better suited for the director’s job. By their inability or refusal to bring up this obvious point, filibuster-minded Republicans unwittingly endorse DeMarco’s enemies – that is to say, Watt’s allies. There is no reason, other than fear of a backlash from ideologically-charged civil rights and community activists with their eternal cry of “racism,” why DeMarco can’t continue to serve in his position. The problem with Melvin Watt is not his qualifications to head FHFA; it’s his view of that agency’s mission. And there are two main problems with that view.
First, he almost certainly would use his office to steer as much mortgage credit as possible toward current and future black/Hispanic borrowers, and neighborhoods in which they live, regardless of creditworthiness. It was precisely this affirmative action mentality, as forced upon banks, thrifts, mortgage companies, Fannie Mae, Freddie Mac and (implicitly) the Federal Reserve System over at least a decade and a half, which led to the mortgage industry collapse and its aftershocks. And the evidence is incontrovertible that blacks and Hispanics defaulted on their loans at much higher rates than whites. As someone who doesn’t believe in race-neutral mortgage lending, Watt would encourage more of these results.
Second, Watt doesn’t seem to grasp that Fannie Mae and Freddie Mac should not be extensions of the federal government. Conservatorship was set up as a temporary arrangement through which these corporations could pay back bondholders. Once the aid they receive from the U.S. Treasury is fully repaid – and that is imminent – the companies should be returned to the market, free from federal control. At the same time, they should be responsible for managing their own balance sheets without any “too big to fail” assurances. Unfortunately, that’s not likely to happen. The government has these two companies in an iron grip. The loans from the Treasury Department were actually purchases of senior preferred company stock. And by agreement, the companies do not have the right to buy back these shares, even after fully repaying the debt. On top of that, they must continue to forward all future dividend payments. As much as the government’s forced auto industry bankruptcies and bailouts, this amounts to legalized theft. Those who would hold Fannie Mae and Freddie Mac perpetual hostage in this manner – and Mel Watt would – are enabling thievery.
The future of Fannie Mae and Freddie Mac is very much in doubt. A bill unveiled early this summer by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., and another introduced by Rep. Jeb Hensarling, R-Tex., each proposed phasing out the two GSEs and replacing them with an ostensibly more modern, market-based system. Yet aside from the logical obstacles in winding these companies down, such action is not necessary. The problem with Fannie Mae and Freddie Mac these past several decades has not been their existence; it’s been their government-granted duopoly privileges unavailable to competitors. Unfortunately, with Melvin Watt controlling their operations, they would be forced to function as government agencies for the duration of their existence. If and when President Obama does re-nominate Watt, the Senate once more should reject him. Melvin Watt’s sense of accountability is less to the general public than to his favored constituencies.