WASHINGTON — Despite resistance from the Federal Home Loan banks, the new leader of the Federal Housing Finance Agency, Ed DeMarco, says the system should continue to move toward greater consistency in its accounting.
"It's in their interest," he said in a recent interview. "They're the ones borrowing in the marketplace, and they're the ones that therefore have the interest in investors being assured of the quality of the financial disclosures."
Though the Home Loan banks have steered clear of the worst disasters during the financial crisis, they have struggled under the weight of souring private-label, mortgage-backed securities in the past two years. The system eventually adopted uniform standards to account for the holdings, but the episode highlighted the system's oddities.
"It's a rather unique situation in which each of the 12 banks are independent [Securities and Exchange Commission] registrants filing reports but the system borrows from the capital markets as a system and its combined financial statement is a key element of what investors consider when they lend to the system," DeMarco said. "The goal here is one of enhancing that consistency and robustness of these disclosures for the markets."
Comments are due next week on a Finance Agency proposal that would expand the number of independent directors sitting on the board of the Office of Finance, which issues debt for the Home Loan banks, from one to as many as five. Under the proposal, the independent directors would make up the audit committee, which would have the power to "establish common accounting policies and procedures for the information submitted by the banks … for the combined financial reports."
This has raised concern that individual Home Loan bank boards could be taken out of the process of developing accounting standards.
"I would not expect that to be the case," DeMarco said. "But it is in fact normal corporate governance that audit committees in private companies are made up of independent directors and there are certain requirements in regard to their background and expertise."
DeMarco has worked at the Finance Agency and its predecessor, the Office of Federal Housing Enterprise Oversight, since October 2006. He took the helm of the Finance Agency on an interim basis in August after James Lockhart resigned to take a private-equity job.
Like his predecessor, DeMarco is urging policymakers to table questions about the future of Fannie Mae and Freddie Mac and focus on the broader issue of reforming the secondary mortgage market.
"The right way to approach this is not by just focusing on what happens to Fannie and Freddie but what do we want to see out of a secondary mortgage market and what's the government's role," he said.
The White House is expected to release its plan for the GSEs in February.Meanwhile there appears to be no rush to find a permanent successor to Lockhart; DeMarco deflected questions on how long he plans to stay in the job.
"I serve until such a time that the president nominates and the Senate confirms someone for the position," he said. "I have no idea [of] the timeline for that."