A hair-of-the-dog appointment

For a White House that often appoints left-wing ideologues (think Van Jones) or activist bureaucrats (think Elizabeth Warren) to important posts, the Obama administration may have gotten the full package in Joseph A. Smith Jr., its nominee to direct the Federal Housing Finance Agency. But is Smith, the commissioner of banks in North Carolina since 2002 and a liberal bureaucrat, the right man for this job?

That President Barack  Obama finally nominated someone for the position is news in itself. The FHFA is a relatively new agency, formed in 2008 by the merger of the Federal Housing Finance Board, the Office of Federal Housing Enterprise Oversight, and an office at the Department of Housing and Urban Development. Edward DeMarco has been acting director since August 2009, taking over from the first director, Bush appointee James Lockhart. Smith’s nomination in November comes well over a year and a half after Obama took office.

Smith, 61, would be directing an agency that ostensibly regulates all of the federal home loan institutions. Since September 2008, however, the FHFA has acted primarily as the conservator of Fannie Mae and Freddie Mac. Managing these two insolvent government-sponsored enterprises will be the director’s foremost responsibility.

A graduate of North Carolina’s Davidson College, Smith worked in Washington in the financial services regulatory practice of law firm Thacher Proffitt & Wood. Before Democratic governor Mike Easley named him banking commissioner, Smith was counsel for Centura Banks, a bank based in Rocky Mount that grew into the regional giant RBC Bank. This career in regulatory law culminated in eight years as the chief regulator of North Carolina’s financial sector.

Bill Graham, a former banking commissioner in North Carolina, confirms that Smith is popular with bankers and also calls him a “nice guy” and an “awfully good regulator.” Graham says his own tenure as commissioner was more relaxed and describes Smith as a much more activist regulator. “He’s an aggressive regulator in the consumer sense,” Graham says. “He’s probably more hands-on.”

Still, Graham says, Smith’s new job would be a “different ballgame” from regulating state-chartered community banks in North Carolina. And some Republicans are concerned that Smith brings to the FHFA a regulator’s agenda when Fannie and Freddie need an executive’s approach.

While Smith may have the reputation of a pragmatist, moreover, his record shows he’s more of a conventional liberal. As banking commissioner, he has aligned himself with the left-wing Center for Responsible Lending, even naming its president his deputy commissioner.

Small government federalists, meanwhile, have reason to be concerned by Smith’s rhetoric on mortgage lending. In November 2007, Smith told a conference that he supports federal legislation to create a “centralized and coordinated system” for licensing individual loan originators. He also believes that Congress should “increase consumer representation when obtaining a mortgage through education, counseling, and/or improved disclosures.”

This is a theme for Smith’s policy views: Consumers need government intervention to make the right decisions. “My experiences in North Carolina have indicated that the complexity of the mortgage market can make it difficult for borrowers with demonstrated credit problems to make good choices,” Smith testified in March 2007. “Policymakers and regulators should simplify the process to purchase a sound loan which will promote sustainable homeownership.”

“Sustainable homeownership” is part of Smith’s mission of expanding the demand for mortgages. According to the Charlotte Observer, one of Smith’s top priorities as commissioner has been to “bank the unbanked,” particularly the poor and immigrants.

The extension of easy credit is what economist Raghuram Rajan argues contributed to the financial crisis in the first place. Subprime mortgage lending, encouraged by government policy and regulations, introduced too much risk and distorted the wider mortgage market, creating the bubble that burst in 2008. Smith is an express proponent of this sort of governmental engineering of financial markets for desired social outcomes.

Ultimately, these ideological goals will conflict with the more pressing matter of risky-lending-gone-bad at Fannie Mae and Freddie Mac. Republicans will push for a managed shutdown of the pair in the next Congress, but with a permanent director like Smith at the FHFA, Fannie and Freddie may just keep muddling through. Grab your wallets.

Michael Warren is a contributing writer at The Weekly Standard.

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