"What does that mean to have two government guaranteed programs competing with each other?" said former FHFA chief Ed DeMarco, criticizing efforts by the FHA and GSEs to boost credit.
"What does that mean to have two government guaranteed programs competing with each other?" said former FHFA chief Ed DeMarco, criticizing efforts by the FHA and GSEs to boost credit. Bloomberg News

Congress' failure to pass housing finance reform legislation continues to pose a threat to the country, and policies under the Obama administration risk repeating mistakes that led to the financial crisis, according to former Federal Housing Finance Agency chief Edward J. DeMarco.

DeMarco criticized recent moves by the administration to boost credit availability at a private event on Thursday, echoing Republicans' concerns that such policies could endanger the housing market.

"In the past year or so we've actually seen a renewed policy focus on questions regarding access to credit, which can risk repeating the approach that contributed to the financial crisis—that being the government's rather vigorous concern about expanding access to credit," DeMarco said, according to an audio recording of the event obtained by American Banker. "That's not to blame the conservator, whoever it is, it is pointing out the consequence of having a lack of legislative action and having these two companies continuing to operate in conservatorship."

DeMarco declined to elaborate on the remarks when reached by email Friday.

The Obama administration has sought to promote credit availability by cutting Federal Housing Administration mortgage insurance premiums and encouraging FHFA to allow lower-down payment loans to be purchased by Fannie Mae and Freddie Mac.

DeMarco questioned such moves, arguing that FHA and the government-sponsored enterprises are now essentially competing for borrowers, which could spur unnecessary risk-taking.

"What does that mean to have two government guaranteed programs competing with each other?" he said. "If you are a taxpayer, does that scare you?"

DeMarco became acting director of FHFA in 2009 after its first head, James Lockhart, stepped down. Afterwards, DeMarco became a lightning rod for criticism based on the FHFA's moves to lessen Fannie's and Freddie's presence in the mortgage market. Republicans praised such efforts, while Democrats argued he was cutting off credit availability. DeMarco was succeeded in 2014 by former Rep. Mel Watt, who has taken a different approach, including allowing the GSEs to buy low down-payment loans.

DeMarco criticized lawmakers' failure to pass GSE reform, and said the mortgage finance system has "worked to promote housing debt, rather than home ownership."

He said the conservatorships of Fannie and Freddie, which began in 2008, have been a "timeout of unintended duration" and that Congress must act to lighten the public's role in backing three out of four mortgages today.

"Billions of dollars sit on the sideline… because the rules are uncertain, the government controls the field and the future legal structure is unknown," he said.

Fannie and Freddie together back about $4.5 trillion in mortgage debt across the country. Their continued dominance poses taxpayer risks, according to proponents who want them wound down and to see private capital expand.

While at FHFA, DeMarco had planned to reduce the GSEs' conforming loan limit, something reformers argue is important to allowing private capital back into the market. But Watt has indefinitely delayed any action on that front. His office continues to review the situation, according to officials at the FHFA.

"FHFA is not proceeding with a gradual reduction in loan limits—a decision that inhibits the return of private markets," said an accompanying presentation written by DeMarco and Phil Swagel, a senior fellow at the Milken Institute. (Swagel is a former Bush administration official in the Treasury Department.)

DeMarco suggested he supports the GSEs' recent credit risk transfers and sales of non-performing loans. Freddie just released new guidelines ahead of more non-performing loan sales, the most recent of which took place earlier this month. Investors anticipate a first such sale from Fannie this year. Together the two companies have about $240 billion in non-performing loans on their books, according to data from JP Morgan Securities.

Both GSEs ramped up their credit risk transfer programs last year, and more innovation to those transactions is expected this year. The goal is to test out both pricing and investor appetite. Executives want to broaden and deepen the investor base and create additional liquidity for such deals.

A spokesperson for FHFA declined to comment for this article.

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