Housing Pick Faces Opposition

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The Wall Street Journal
By: Nick Timiraos
December 20, 2010

The White House's pick to head the agency that oversees Fannie Mae and Freddie Mac appears unlikely to win Senate confirmation before Congress adjourns due to a sharp policy disagreement between the White House and Senate Republicans over how to regulate the mortgage-finance giants.

Senate Republicans are pressing to delay the confirmation of Joseph A. Smith, the North Carolina banking commissioner, to head the Federal Housing Finance Agency. They are concerned he might allow Fannie and Freddie to participate in an Obama administration initiative to write down loan balances, say people familiar with the matter.

Mr. Smith first appeared to be headed for a quick confirmation. But he has become tripped up by a broader fight between the White House, which wants to use the firms to help heal housing markets, and GOP critics that say they shouldn't be run as policy vehicles that create more losses.

So far, the firms and their regulator have resisted participating in the program, which is being managed by the Federal Housing Administration and allows banks to write-down loan balances for borrowers who owe more than their properties are worth.

Treasury Secretary Timothy Geithner told a congressional panel on Thursday there "is a pretty good economic case for Fannie Mae and Freddie Mac to participate in those programs."

While the housing finance agency is independent, it has an awkward relationship with the executive branch because the Treasury effectively owns Fannie and Freddie, which are being propped up with $150 billion in Treasury money. The housing finance agency's goal to conserve assets and limit losses can sometimes conflict with the policy agenda of the White House.

While writing down mortgage principal could lead to larger upfront costs, Mr. Geithner encouraged policymakers on Thursday to take a broader view. "If you do things that improve the odds that home prices will be higher in the future, that defaults will be lower in the future, then you can...reduce the overall losses to the taxpayer," he said.

Republicans say such initiatives would be too expensive. At a recent hearing, Sen. Richard Shelby (R., Ala.) said allowing Fannie and Freddie to participate in the writedown program would amount to "redistribution from taxpayers in general to certain classes of home owners."

Mr. Smith hasn't publicly indicated support or opposition to the proposal. In written testimony, he said he would consider any proposal "first and foremost" with an eye towards "protecting taxpayers." As the head of an independent state agency, he wrote, "I understand how important that independence is."

Republicans have raised concerns that Mr. Smith has been too evasive in answering questions posed by lawmakers, that he might be too willing to accommodate the administration, and that his nomination was being considered too quickly, these people said.

Mr. Smith, who has served as North Carolina's top banking regulator since 2002, helped implement some of the nation's first regulations to protect borrowers from predatory lenders. Mr. Obama nominated him last month to head the housing finance agency, which has been without a permanent director since August 2009. His nomination was approved on Tuesday by the Senate Banking Committee on a 16-6 vote.

In a statement last week, Mr. Shelby, the top Republican on the committee, questioned whether Mr. Smith had enough experience and whether he would be sufficiently independent from the administration. "We need a watchdog not a lapdog," he said.

On Friday, Sen. Tim Johnson (D., S.D.), who is set to chair the committee next year, called on the Senate to "put politics aside and confirm his nomination quickly" given the challenges facing housing markets.

The nomination of Mr. Smith, who remains well regarded by banking executives and consumer advocates alike, would need to be resubmitted when the Senate reconvenes next year if a speedy deal is not reached.

Democrats will retain control of the Senate, but with more Republican opposition, it could now take longer to secure his confirmation. It isn't uncommon for lawmakers to hold up nominations in order to seek more clarity about a candidate's views on policy matters.

Some Senate staffers in recent days have questioned whether Mr. Smith would be a better choice than Edward DeMarco, the agency's acting director, these people said.

Mr. DeMarco has taken a firm position against allowing the companies to participate in policy initiatives that might lead to larger losses. Earlier this year, he directed the companies not to participate in a White House-backed initiative to finance energy-efficient home repairs. In July, the agency subpoenaed 64 issuers and servicers of mortgage-backed securities to determine whether firms misled Fannie and Freddie when they issued those bonds.

Write to Nick Timiraos at nick.timiraos@wsj.com

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