New York AG's Memo Says Obama Can Replace FHFA's DeMarco

New York Attorney General Eric Schneiderman has some legal advice for the White House: It can ax Edward DeMarco without Congress' OK.

Federal law gives President Obama the ability to remove the Federal Housing Finance Agency's acting director and replace him with one of three deputies, Schneiderman's office concludes in a memo obtained Thursday by news outlets.

The missive comes as the latest swipe in a series of calls by DeMarco's critics for the president to replace the embattled administrator for rejecting a proposal last year by the Treasury Department to give Fannie Mae and Freddie Mac a financial incentive to forgive part of the principal on loans for borrowers who are facing foreclosure. A 2008 law that created the FHFA made the agency overseer of the mortgage giants.

The White House has said it disagreed with DeMarco's stance but suggested that the president lacks the legal authority to replace him without naming a permanent successor, who by law would have to be confirmed by the Senate.

In 2010, President Obama nominated former North Carolina Banking Commissioner Joseph Smith to replace DeMarco but withdrew the nomination after Senator Richard Shelby, R-Ala., then the top Republican on the Banking Committee, charged that Smith would yield to pressure from the administration to implement mortgage write-downs.

Senators will have another opportunity to weigh in on the FHFA's handling of housing finance on Thursday, when DeMarco is scheduled to testify before the Banking Committee. The hearing is meant to evaluate the agency's performance as a regulator and conservator for Fannie and Freddie.

In the meantime, two of Schneiderman's top deputies say the president can remove DeMarco, although they hedge slightly on whether the president has the authority to unilaterally appoint a successor.

"We conclude that the president has the authority to remove the acting director at will, and that there is a strong argument that he also has the authority to designate a new acting director, although the answer to that question is less certain," Barbara Underwood, the state's solicitor general, and her deputy, Brian Sutherland, wrote to Schneiderman in the memo, which was dated Feb. 25 but disclosed Thursday.

The memo suggests the president could replace DeMarco with Sandra Thompson, whom DeMarco appointed in January to serve as the FHFA's deputy director. Thompson previously held a series of senior posts at the Federal Deposit Insurance Corp. over the course of 23 years there.

A spokesman for Schneiderman declined to comment on the memo. An FHFA spokeswoman also declined to comment.

A White House spokesman did not respond immediately to a request for comment.

DeMarco, a career civil servant whom the president designated as the FHFA's acting director in August 2009, has inflamed people inside and outside the Obama administration over his refusal to accede to the loan modification proposal.

In July, former Treasury Secretary Timothy Geithner urged DeMarco to reconsider his decision. "Five years into the housing crisis, millions of homeowners are still struggling to stay in their homes, and the legacy of the crisis continues to weigh on the market," Geithner wrote to DeMarco. "You have the power to help more struggling homeowners and heal the remaining damage from the housing crisis."

"We certainly believe that the action that Mr. DeMarco, after six months of study, refused to take [action that] should have been taken -- could be taken to further assist homeowners," White House spokesman Jay Carney told reporters in August, although Carney said FHFA's independence prevented the president from firing DeMarco and replacing him with a director who would be more in receptive to the administration's call.

For his part, DeMarco contended that the benefit of using public funds to write down mortgages would be outweighed by the costs and risks. The FHFA concluded that the proposal "did not clearly improve foreclosure avoidance while reducing costs to taxpayers relative to the approaches in place today," DeMarco said in a statement last July.

In February, Rep. Elijah Cummings, D-Md., the top Democrat on the Oversight and Government Reform committee, and 44 of Democratic House members asked the president to replace DeMarco, whom the group charged "refused to allow the implementation of a pilot program to examine whether a principal reduction program could reduce costs to taxpayers while helping borrow stay in their homes."

Five weeks later, Schneiderman and Massachusetts Attorney General Martha Coakley led a group of nine state attorneys general who demanded a change in the FHFA's leadership. "By refusing to allow for principal write-downs that would result in more loan modifications, FHFA stands as a direct impediment to our economic recovery," the officials wrote to the president and Senate leaders.

On April 3, Schneiderman again took aim at DeMarco, who Schneiderman charged in an op-ed was "standing in the way" of efforts by the administration to implement a program that would authorize Fannie and Freddie to write down mortgages.