North Carolina Banking Commissioner Joseph A. Smith Jr. is being tapped by the White House to head the regulatory agency that oversees mortgage giants Fannie Mae and Freddie Mac.
The Federal Housing Finance Agency has been without a permanent director since August 2009. A new director would preside over the mortgage-finance titans just as an intense political battle begins over what should happen to the companies.
The FHFA, created in July 2008, is overseeing the conservatorship of Fannie and Freddie, which are entering their third year under government control. The agency also regulates the Federal Home Loan Banks.
In Smith, the Obama administration is selecting a regulator that helped implement some of the nation’s first regulations to protect borrowers from predatory lenders. Mr. Smith has served as North Carolina’s banking commissioner since 2002.
His efforts have won plaudits from consumer advocates, and he remains well-regarded by the banking community. “It’s a mixed blessing for us. We hate to lose him as our commissioner,” said Paul Stock, general counsel of the North Carolina Bankers Association.
At a 2007 Senate hearing, Smith singled out federal banking regulators for too often resisting efforts by state regulators to root out predatory lending. He warned that federal safeguards had been insufficient given that drastic changes in the mortgage industry had created “an environment of negligence in lending practices and increased borrower confusion.”
One way the government could prevent lenders from taking advantage of borrowers with credit problems, he said, would be to ensure that Fannie, Freddie and government agencies such as the Federal Housing Administration “devote their primary attention to affordable housing for all Americans, particularly the subprime market.”
Smith would replace Edward DeMarco, a career civil servant who has been acting director. While the FHFA is an independent agency, it faces a tough balancing act because the government effectively owns Fannie and Freddie, which have been kept afloat with $151 billion in Treasury infusions.
That means the FHFA often has to seek the government’s blessing on certain initiatives. The arrangement can lead to conflicts between the FHFA’s goals — to minimize losses at Fannie and Freddie — and government efforts to reduce underwater borrowers’ mortgage balances or supporting new lending.
Under DeMarco’s watch, the agency has taken more steps to recoup losses. In July, the agency subpoenaed 64 issuers and servicers of mortgage-backed securities to determine whether certain firms misled Fannie and Freddie when they sold privately issued mortgage bonds.
The agency also effectively blocked a White-House backed effort to facilitate home-energy improvements when it told the firms to steer clear of that initiative.
Those decisions have “stymied efforts to use Fannie and Freddie as a sponge of social policy,” says Joshua Rosner, managing director at investment-research firm Graham Fisher & Co. DeMarco, he says, has “unquestionably, aggressively protected the taxpayers’ interests.”
DeMarco has also supported Fannie and Freddie’s efforts to kick back more loans to lenders that didn’t meet the agency’s underwriting standards, and he has defended the agency’s higher loan pricing fees.
Some mortgage bankers say those actions have led to overly stringent lending standards and weak borrower demand that has hindered efforts to refinance loans while mortgage rates are near record lows.
Smith worked for New York-law firm Thacher Proffitt & Wood before taking the North Carolina position. He was general counsel for Centura Banks Inc., of Rocky Mount, N.C., from 1991 to 2000.
Last month, Mark Pearce, North Carolina’s deputy commissioner of banks, was named to head a newly created consumer protection unit at the Federal Deposit Insurance Corp.
