http://www.freddiemac.com/blog/docs/layton_mba_summary.pdf
“As a result of a lot of hard work and, in truth, favorable markets, we have achieved what some thought impossible: we have dividended back to the taxpayer more than we borrowed. Under the truly unique terms of our agreement with Treasury, none of the money we pay counts toward principal repayment, but we’re still proud that we exceeded the amount we borrowed — and by so much.
So, we’re big believers in non-legislative GSE Reform and a future with more competition and less duopoly. We think it will make a better finance system, beginning now. We think it will position the GSEs and the industry better to deal with eventual legislative reforms. And I believe it will make Freddie Mac a better company for its people and its customers.
Thanks for listening. We look forward to doing more business with you in the future because we will earn it by becoming better and better.” quote from speech delivered by Donald Layton,CEO Freddie Mac
Read and see complete message from Layton
Mortgage Bankers Association Annual Convention
“GSE Reform – Where Do We Go From Here?”
Excerpts from Remarks Prepared for Delivery by Freddie Mac CEO Donald H. Layton October 20, 2014
Thanks, Bill, for that kind introduction. As I say every year I’m here, I am always happy to talk to so many of our customers and potential customers at the annual MBA meeting.
My purpose today is to directly address the topic of our talk – Where Do We Go From Here In GSE Reform – by giving you several key insights. I believe at least some of these insights will help YOU navigate through the changing and still-difficult mortgage markets of the next few years.
GSE Reform does NOT mean just legislative action
Legislative GSE Reform – often called Housing Finance Reform as it addresses issues more broadly – today seems to be at a stand-still. By contrast, non-legislative GSE Reform has been going on for several years, continues strongly today, and I expect it to be a “big deal” over the next few years. This non-legislative GSE Reform is led overwhelmingly by the FHFA through its role as conservator of the GSEs. The focus of my comments today will be to address this non-legislative GSE Reform as it so strongly impacts the industry. One additional insight is that non-legislative GSE Reform is squarely aimed at not pre-empting Congress’ choices. In fact, the two exist in somewhat different worlds, although there is some modest overlap.
Category #1 – Reducing taxpayer exposure to mortgage risk
This is probably the biggest single policy objective of the Administration with respect to GSE Reform. If there were another big downturn in the next few years, the government does not want the taxpayer to be subject to first-dollar losses more than necessary with the potential for large draws on the U.S. Treasury.
First, there is the focus on legacy mortgage risk, i.e. on our assets acquired before 2009.
• These efforts first included HAMP, HARP and other modification efforts which generate a positive net present value. Homeowners were helped, for sure, but our exposure was also reduced.
• It also included FHF A ’ s direction to sell off the retained investment portfolio’ s legacy mortgage risk in an economically sensible manner. Until then, the GSEs had been in “buy and hold” mode almost exclusively, selling little if anything off from their investment portfolios.
More recently, the policy direction to the GSEs has been to also focus on new mortgage flow, i.e. to develop the market for selling off first-loss risk on our traditional guarantee book. Freddie Mac has embraced this enthusiastically. This has included the following:
• K-Deals in the MF business, where we have completed more than $80B over the last five years.
• Our award-winning STACR® structure, which has become the backbone of the single family credit risk transfer markets so far. We have now executed 7 transactions totaling $5.0B.
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• We also have our ACIS transactions – which is another version of credit risk transfer – to access capital in the global reinsurance market.
I have some additional insights focused on creating this new market. Developing the financial technology to lay off risk to the private capital markets – for both legacy and new flow books – is painstaking and long-term work. It requires developing the investor base and securities structures for an entire new asset class, and one that is GSE-sized, i.e. extremely large. I personally consider us to be approaching second base in this multi-year effort.
Category #2 of non-legislative GSE reform
The FHFA Conservatorship Scorecards make it very clear that the FHFA is leading, through its control of both GSEs, the modernization and reform of many of the fundamental mechanics and structure of today’s national mortgage markets.
We all know that the industry has a reputation for being a bit antiquated, a bit hard to modernize and change. Well, the FHFA is directly addressing this on many dimensions. And the industry is better off for it.
What are some examples of this? Just a fraction of them would include:
• The high-profile changes in infrastructure through a Common Securitization Platform and a Single Security. Both are underway now via FHFA leadership.
• Less high profile are all the changes to the operational and technology infrastructure of the industry. This would cover things like the servicer alignment initiative, as well as all the “big data” initiatives like the Uniform Loan Application Dataset and the Uniform Closing Disclosure Dataset to get better data standards upon which we can build new capabilities.
• Another is upgrading how Mortgage Insurers work with the GSEs. Already completed is the new MI “master” contract, to reduce the risk of excessive rescissions, which has caused so much uncertainty to so many. And the latest for MIs is of course eligibility standards, with public comments just in.
• And then there is the Representation & Warranty system. It has been modified twice so far by the FHFA to make it more balanced and usable. And we are now working with an MBA-coordinated committee to make further and more fine-grained refinements, to hopefully loosen up credit so our credit box can be more fully utilized. Director Watt spoke to this in detail earlier today.
• My insight in this area is that I think it is great that these improvements are moving forward now, today, without waiting for legislation.
Category #3 of non-legislative GSE Reform
My third non-legislative GSE Reform category is very different than the first two. This insight is very much Freddie Mac-centric. Simply put, my management team and I are breaking with the company’s tradition and past and “reforming” Freddie Mac as a company.
We no longer wish to act like the duopolist we were historically. Instead, our vision is to COMPETE for your business – just as if there were many more than two guarantors. And while still in Conservatorship, without waiting for legislation. We do this because it is part and parcel of a better system of housing finance. And it is likely to position us well for whatever
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eventually comes along in a future state. This is a cultural revolution given the history of the GSEs.
To demonstrate this change in mindset, let me focus on Customer Service. We are doing a lot of things to improve it. Here are several examples:
• We cut more than in half the time it takes to onboard new single-family lenders.
• We are now completing performing loan quality control reviews in 19 percent fewer days
than at the start of the year.
• We have reduced the timeframe to respond to customers’ credit requests by 30 percent
from a year ago.
• And we have reduced the turn time for customer contract revisions by 16 percent on
average from a year ago.
We are also increasing our focus to win more share among lenders of all sizes. This is a significant change for us, as Freddie Mac had become very large-lender focused by the start of conservatorship.
• We have added more sales resources to focus on the small and rural lender segment.
• We offer targeted community lender training to connect small and mid-sized lenders to
Freddie Mac subject-matter experts on important issues. Over 1,000 have attended year-
to-date.
• And we hold special update calls for small and rural lenders to review our recent policy
and technology announcements. Approximately 1,600 lenders have participated year-to-
date.
• So, we are now aiming at best-in-class customer service to smaller lenders as well as
large. We realize that we are helping to build a better nationwide system of housing finance when we help lenders of all sizes compete.
And lastly, we are operating like a company that has to compete – hard – for your business. This is helping to turn Freddie Mac into a more normal commercial enterprise; one that can potentially thrive outside of a duopoly should GSE Reform legislation head in that direction. This will take many years to bring to full completion, but we’re definitely well on our way.
One final insight
As a result of a lot of hard work and, in truth, favorable markets, we have achieved what some thought impossible: we have dividended back to the taxpayer more than we borrowed. Under the truly unique terms of our agreement with Treasury, none of the money we pay counts toward principal repayment, but we’re still proud that we exceeded the amount we borrowed — and by so much.
So, we’re big believers in non-legislative GSE Reform and a future with more competition and less duopoly. We think it will make a better finance system, beginning now. We think it will position the GSEs and the industry better to deal with eventual legislative reforms. And I believe it will make Freddie Mac a better company for its people and its customers.
Thanks for listening. We look forward to doing more business with you in the future because we will earn it by becoming better and better.