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State's attorney argues Obama can oust housing regulator DeMarco

WASHINGTON (Reuters) - President Barack Obama has the power to oust housing regulator Edward DeMarco and very likely the authority to replace him without congressional approval, New York Attorney General Eric Schneiderman argued on Thursday.

DeMarco, regulator of housing finance giants Fannie Mae and Freddie Mac, has been under attack from liberal activists who claim he has done too little to aid struggling homeowners. Schneiderman and several other state attorneys general agree.

A federal appeals court ruled in January that Obama violated the Constitution when he installed three nominees to a labor board without Senate approval through so-called recess appointments.

An eight-page memorandum prepared by Schneiderman's legal team and obtained by Reuters on Thursday examined the law that created the Federal Housing Finance Agency, which DeMarco heads.

"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," the memo stated.

The memo said the White House could likely replace DeMarco with one of the agency's deputy directors, as stated by the law. DeMarco himself was a deputy when the agency's previous chief left in 2009. DeMarco was never nominated for the job and has been serving only on an acting basis without Senate approval.

The memorandum said Sandra Thompson, recently appointed to serve as a deputy director, was a viable replacement.

Obama attempted to replace DeMarco in 2011, but Senate Republicans blocked his nominee.

The court ruling in January has led analysts to believe Obama is unlikely to use a recess appointment to replace DeMarco. However, sources familiar with the matter have said the White House has combed through possible nominees looking for someone to face Senate consideration.

Last month, the Wall Street Journal reported Representative Mel Watt, a North Carolina Democrat, was on the White House's short list for the FHFA director role.

Liberal critics take issue with DeMarco's decision to block Fannie Mae and Freddie Mac from reducing loan principals for borrowers who owe more than their homes are worth, a position at odds with the desires of the White House.

(Reporting by Margaret Chadbourn; Editing by Tim Ahmann)

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