How Ed DeMarco finally cried fraud

By Maureen Tkacik The opinions expressed are his own.

It took three years, but Fannie/Freddie Conservator Ed DeMarco is starting to channel his inner Irving Picard by acknowledging that among root causes of the financial crisis is fraud, and lots of it.

Like Madoff's estate, Fannie and Freddie have spent the last three years under a kind of bankruptcy protection, led by a conservator, DeMarco, whose top priority is to maximize the value of the national "estate" and thereby minimize harm to the housing bubble's innumerable victims. As both trustees' travails demonstrate, it's a thankless job: Madoff's former investors smear Irving Picard in the press so regularly it's as if they forgot about Madoff, and Fannie/Freddie conservator Edward DeMarco has alienated so many politicians with his long list of offenses that Timothy Geithner, who recommended him for the job in the first place, is now said to be plotting to oust him.

But where Picard has annoyed by taking a direct approach to the job, DeMarco's actions have been mystifying. Picard has: canceled the car leases, gym memberships, etc.; listed Madoff's houses/boats/jewelry for sale or waited until the market recovers; and (this is the controversial part, but it's also brought in the big bucks) filed "clawback" suits against anyone who booked fictitious profits off their Madoff "investment" in order of biggest to smallish; reimburse, rinse, repeat.

By contrast, Fannie and Freddie have focused their clawback actions almost exclusively on the hardest hit victims of the housing crisis: struggling homeowners whose outstanding mortgage balances are worth more than their houses, and we taxpayers, who get hit up for a new cash infusion just about every month, for a total that should soon top $ 200 billion. DeMarco, whose enterprises own or guarantee half the outstanding mortgages in America, has not only flatly refused time and again to modify underwater mortgages, he's actually promised to sue any delinquent borrower his agency suspects of taking Suze Orman's advice and defaulting "strategically." (Yesterday's announcement by President Obama that some FHFA regulations were being scrapped to help homeowners refinance is the first let-up on underwater borrowers by DeMarco, and by all appearances, it was policy driven from the White House, not his office.)

Also: a whistleblower lawsuit filed last year accuses Fannie of deliberately sabotaging struggling homeowners who sought mortgage modifications ostensibly offered in the Administration's 2009 mortgage relief program HAMP by pushing them into temporary modifications—for which Fannie executives drew fat rentention bonuses—with no follow-up or due diligence, then dropping the ball. More recently a harrowing three-part investigation in the Detroit Free-Press chronicled the GSE's pattern of intervening in other banks' mortgage modification negotiations, in which Fannie seems to be systematically using its authority as a mortgage guarantor to force (and accelerate) foreclosures even when banks would rather work out a deal.

Tapped-out homeowners aren't the only ones the mortgage monsters are fighting bitterly in America's courtrooms: in September Freddie Mac sued the IRS to keep $ 3 billion in back taxes they allegedly owed from the Bush Administration years during which they had understated their earnings. (In this case they had inspiration: ward of the state AIG filed a similar complaint in 2009.)

Meanwhile on the big fish end of operations, DeMarco has left "billions of dollars" at the negotiating table with other TBTF counterparts, according to an inspector general report just released. The report suggested that a $ 1.35 billion settlement Freddie Mac had struck to indemnify Bank of America over a bad batch of Countrywide loans might have been ten times that size if Freddie management had honestly estimated its losses in the deal.

Taken together, it's as if Fannie and Freddie have spent their three years in conservatorship deliberately living up to the ruthlessly wasteful, barbaric and out-of-control reputations Republicans have so long ascribed to them, only with a critical difference: where the mortgage giants were once reviled in conservative mythology for "forcing" banks to lend to low-income minorities as part of a liberal wealth redistribution conspiracy—predatory lending is only ever motivated by federally mandated altruism, by this narrative of recent events—their new wealth distribution scheme has a reverse Robin Hood agenda in mind, and they're spraying around our tax dollars like water to achieve it.

More disturbingly still, once DeMarco began cautiously moving earlier this year to reverse some of the housing giants' more perverse policies, Treasury Secretary Geithner reportedly began looking into ways of getting him sacked—a call which was soon echoed by a chorus of liberal Congressional Democrats. Given Geithner's well-documented taste in regulatory rivalries—he allegedly labored relentlessly and with considerable success to undermine Sheila Bair and Elizabeth Warren, who were both reviled by banks and beloved by progressive legislators—along with the fact that he personally takes credit for recommending DeMarco, originally a Bush appointee, for the job, it's doubtful his gripes with DeMarco have much overlap with those of, say, Rep. Dennis Cardoza, whose central California district boasts three of the nation's ten cities hardest hit by the foreclosure crisis and merely wants the FHFA director to relax standards currently preventing underwater homeowners from refinancing at today's ultralow Depressionary rates.

"Allowing underwater homeowners to refinance is really the definition of no-brainer," says Lawrence White, an economist and former Freddie Mac board member who co-authored Guaranteed To Fail: Fannie Mae, Freddie Mac and the Debacle of Mortgage Finance, a critical survey of the housing giants published earlier this year. Indeed, it's an almost hideously modest proposal given the GSEs' comprehensively lousy treatment of homeowners over the past three years—but it's one that DeMarco has at least shown signs of embracing.

What more likely won DeMarco a place on the Treasury Department hit list is his turnaround vis-à-vis the big banks. His decisive change of heart—and more importantly, protocol—was detailed in an inspector general report made public in late September concerning Freddie Mac's negotiation of "putback" actions against banks from which it purchased bubble-era mortgage-backed securities that had since defaulted. DeMarco could have filed suit to force those banks to buy back foreclosed loans whose files contained evidence of fraud. Such lawsuits are theoretically the government's best hope for recouping taxpayer losses—so when Freddie Mac agreed to relinquish its putback rights on nearly 800,000 of epically dodgy mortgages originated by Countrywide Financial for a paltry $ 1.35 billion settlement from [Countrywide parent] Bank of America, a few members of Congress called for an inspector general investigation into the settlement process—and DeMarco quickly called a moratorium on all further putback settlement negotiations pending a review of the process.

That was last January; over the next eight months, DeMarco threw himself into his own investigation into the putback controversy, serving 64 MBS issuers with subpoenas demanding documents detailing every step of the loan securitization process, from original loan files to mortgage pool prospectuses to the contracts inked between securitizers, loan servicers and the assortment of other intermediaries in the convoluted cluster bombs of risk that concealed the impending cataclysms. By the time a September deadline for filing claims against banks stipulated by the conservatorship guidelines rolled around, DeMarco had gathered enough preliminary evidence to sue 18 banks over nearly $ 200 billion in mortgage securities—by far the biggest dollar amount to ever get anywhere near a government lawsuit against a bank.

The financial commentariat welcomed DeMarco's lawsuits as the latest in a series of karmic disruptions to the Obama administration's game plan to save the banks from another rash of government mortgage fraud lawsuits, namely, those potentially filed by the multitude of states attorneys general livid over the laundry list of egregious illegal activities that has apparently come to characterize the modern foreclosure action.

But the lawsuits are also exceptional for the plain fact that they allege fraud, and lots of it. The "F" word is invoked 81 times in the agency's complaint against GMAC alone. This should not be so remarkable, but the simple reason tax dollars would have been better entrusted to Bernie Madoff than Fannie Mae and Freddie Mac is that the "F" word was invoked three years earlier in Madoff's case, while the mortgage giants continued to operate as if the market had merely fallen casualty to a run-of-the-mill cyclical downturn. Now that DeMarco has jolted his agency from the delusion of fraud denialism, however, it's worth revisiting what precisely took so long—and what keeps official Washington so infuriatingly incapable of comprehending the financial crisis for what it was.

Part 2 of Tkacik's commentary will be posted tomorrow.

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