Freddie CEO Subtly Fires Back at Administration Remarks

In the midst of what has been a rather interesting several weeks for housing finance reform Donald H. Layton published a column in Freddie Mac's Executive Perspectives blog.  Layton, CEO of the government sponsored enterprise wrote about his company's transition from what he termed "the early-years conservatorship mindset" characterized by a hesitancy to make decisions, by waiting for the government to tell it what to do or waiting for  "imminent" legislation into being a more aggressive company.  He calls the new Freddie Mac customer-focused and better at execution than ever before. "We're firmly facing the future, not the past. And we're very much working not only to have a better company but also a better housing finance system for all."

Layton said the company's Charter calls on it to keep the mortgage market liquid, stable, and affordable and to be innovative in doing it; to benefit families whether homeowners or renters. In the past the company's approach to its affordability mission was focused mainly on meeting the "narrowly-defined" affordable goals set by the government."  Now it views that mission as one for the community, covering classic affordability as well as other things "like broad access to credit, foreclosure alternatives (which hardly existed pre-2008), and other community-focused priorities."

He cited as indicative of the community focus the company's entry into the low-down payment field with its new 97 percent loan, a new partnership with Quicken Loans to develop products aimed at low to moderate income borrowers, first time homebuyers, and millennials and its increased lending in the multifamily "workforce housing" sector.

Layton said when he became CEO he came with decades of experience in the highly competitive banking world only to find the genteel competition of the GSE duopoly. But today the company has dramatically increased its competitiveness, close to doubling its rating for that quality on a recent consumer survey, and it intends to keep working on improving it.

The company has also begun to focus on business outside of its former small number of large lenders.  Before 2008 only 16 percent of its single-family volume came from lenders outside the top 10.  Now about 50 percent comes from middle-and smaller sized companies after Freddie Mac added sales people and newer service models.

Layton said the company is also focused on making the system better for taxpayers; treating their exposure with great respect through credit risk transfer which is no longer a pilot project but integrated into the entire business model. 

He concluded by saying that the company has come further in the last few years than perhaps in the previous decade but it is not resting on its laurels.  Rather it is determined to get better as a company and, with its regulator and conservator the Federal Housing Finance Agency (FHFA) taking the lead, on making the entire housing finance system better.

Taken at face value Layton's column is merely an update, a bit of corporate PR, maybe a shot of encouragement for a company that has lived with indecision since 2008.  However, against the background other things that have been going on, largely unnoticed by mainstream media over the last two weeks something about it feels like more than casual boosterism.  Here is a bit of a tick tock.

On October 12 the New York Post reported that the White House was seeking to end the conservatorship under which Freddie Mac and the other GSE Fannie Mae has operated since 2008.  With no hope for any comprehensive GSE reform in the current congress the Post said the Administration was working behind the scenes to get something resolved before President Obama's term ends. The push was supposedly happening out of a fear that, should a Republican president be elected next year, he or she would wind down the GSEs and kill the affordable housing mandate.   

In the meantime, the GSEs shareholders, largely hedge funds who bought the stock at fire sale prices after the companies were placed in conservatorship, have recently changed tactics after their lawsuits against the federal government contesting a revision in the original conservatorship agreement have gone nowhere in court.  Now, along with housing advocates, they have undertaken a lobbying effort to persuade the administration to recapitalize and release the two GSEs from conservatorship. One hedge fund manager Bill Ackman, told Bloomberg News that it's clear Fannie Mae and Freddie Mac are here to stay so it makes sense that the government needs a plan to deal with them going forward.  In the meantime proposals to reform the housing finance system remain, as ever, stalled in Congress.

We would imagine that both the Post article and the renewed efforts to return the GSEs to private control may have stoked a few hopes among the Fannie Mae and Freddie Mac staffs.  If so, it didn't last long.

On Monday, Michael Stegman, described as a top White House advisor on policy matters, spoke to the Mortgage Bankers Association's annual convention and made it clear that despite the lobbying the so called "recap and release" proposal ain't going to happen. 

The Administration, he said in prepared remarks, believes that recapitalizing the GSEs with taxpayer funds and administratively or legislatively releasing them from conservatorship with a business model that conflicts with their public mission would be both an exercise of bad policy judgment and poor stewardship of the taxpayers interest, willfully recreating the very system that brought the nation so much harm.

As Stegman's remarks were closed to the public the White House made sure the message got out, doubling down with an editorial in Bloomberg View written by Antonio Weiss a counselor to Treasury Secretary Jacob J. Lew. Weiss called recap and release misguided and said it was not true that homeowners and taxpayers would benefit from the proposal.

First he said, it would do nothing to increase access to the housing market.  Releasing the GSEs from conservatorship would subject them to the same investor pressures that got them into trouble in the first place and there is no evidence that the plan would expand access to credit for homeowners or create more affordable rental units.

Contrary to investor claims, taxpayers have not been fully repaid for the risks they took in rescuing the GSEs he said.  No private investor was willing to step in and help them and the crisis that followed caused immense harm to American households.  Taxpayers have now received more in total dividends than the draws given to the GSEs but the dividends alone aren't adequate compensation for the extraordinary risk taxpayers took on and continue to bear.  The "repayment" argument also conveniently ignores that the $258 billion commitment of Treasury support continues to GSE operations and allows them to borrow at highly favorable rates.

Just allowing the GSEs to retain their earnings would not come close to recapitalizing them as some have suggested, he continued.  A recent analysis from Moody's and the Urban Institute made clear that it could take decades for Fannie and Freddie to build safe and sound levels of capital and that recap and release would ultimately drive up the cost of mortgages.

He concluded that it is time for the housing finance reform and that private capital should take most of the risk, limiting taxpayer exposure to an explicit, appropriately priced guarantee against catastrophic risk.  These goals, and a responsible end to conservatorship, can be achieved only through comprehensive legislation. 

The timing of Layton's column indicates it was intended as a bit of a counterpoint the Stegman and Weiss's remarks.  Or maybe it was long-planned as a pitch to policymakers not to overlook Freddie Mac's reformation as the system itself it reformed.  It could be also that, faced with near certitude of limbo continuing for at least another 15 months Layton just decided it was time to work on corporate morale.