Don't miss Chairman of WGA LLC, Christopher Whalen, and former FHFA chief Mark Calabria detail the tensions and collaborations that are necessary to progress our housing economy. How much can regulators drive and incentivize innovation? How do you increase inclusion without limiting pricing or guidelines? How do you preserve systemic safety while keeping an even playing field for bank and nonbank originators and servicers of all sizes? And most important: how do we keep lenders, regulators, and the fintech community in sync in 2024 and beyond?
Transcription:
IVR (00:06):
And now for the debate you have all been waiting for, please put your hands together for Author, Advisor and former Director of the FHFA. Mark Calabria and chairman at Waylon Global Advisors LLC, Christopher Whalen.
Moderator (00:38):
Alright. I will be the referee today. So thank you guys for coming. No, here's what's going to happen everybody, thank you all for coming back after lunch. We appreciate it. This one's going to be super fun. So we've got innovation conference going on here, but I just wanted to say thanks to the National Mortgage News team and the Digital Mortgage News conference for having a policy and a market debate because how do you innovate and how do you have all these things going on without this infrastructure that you two have so much knowledge over? So I'm going to do some quick intros and then we're going to just get right into the weeds and I think you guys will all see that these two do not mince words about markets or policy. So I'm going to start with you Mark, and just go through some bonafides for those that haven't followed every detail. But you've got this storied policy career on Capitol Hill with early roots at hud, so a long, long housing career Chief economist for the former vice president, Director of the FHFA, previous Director of Fin Reg studies and current advisor at Cato. And your new book, which you all do need to pick up on the shelter from the storm is just this must read in terms of how to bring all this stuff together and how to deal with pandemic policies Even better.
Mark Calabria (02:04):
We've got free copies out there.
Moderator (02:05):
That's right. So am I leaving anything else out on the career track?
Mark Calabria (02:10):
Those are the highlights.
Moderator (02:11):
Okay, so Chris Policy and Wall Street Storied kind of background dating back to Bear Stearns, research head at Carrington Kroll Bond Ratings Agency. I think we're going to talk a little bit about some of the ratings agency stuff that's going on and as it relates to government dysfunction here in a minute. Your firm, WGA Will and Global advisors advises key players on Wall Street and in Washington. Your column on National Mortgage News, his site, the Institutional Risk Analyst, for those of you who haven't seen it or read it or subscribed to it, you got to subscribe to it. What else did I leave out?
Christopher Whalen (02:53):
Well, I think we can stop there.
Moderator (02:55):
Okay, so needless to say we've got the right people up here on the stage. I'm going to do a speed round and I'm just going to go one phrase answers to kick us off. It'll just be a couple of quick fun things to start and then we're going to get into some details, but these are one word or one phrase just to kind of warm us up. So coffee or tea?
Mark Calabria (03:16):
Coffee.
Christopher Whalen (03:18):
Coffee.
Moderator (03:20):
Cats or dogs?
Mark Calabria (03:20):
Both.
Christopher Whalen (03:23):
Dogs.
Moderator (03:25):
Window or aisle? On a plane.
Mark Calabria (03:27):
Aisle.
Christopher Whalen (03:28):
Window.
Moderator (03:30):
Do you watch TV or listen to music?
Mark Calabria (03:38):
More music, but both.
Christopher Whalen (03:41):
Music.
Moderator (03:42):
Okay. I was curious about that one and I figured as writers and research.
Christopher Whalen (03:48):
If you write, you can't watch.
Moderator (03:49):
That's right. Interesting. Last book you read or a reading Now?
Mark Calabria (03:54):
I'm tempted to say my own book, but I can't say that.
Moderator (03:57):
Yes you can.
Mark Calabria (03:59):
Because I do go back and reread it on occasion for things, but I'm going to let Chris answer that and then I'll come back to, what am I reading right now? But the last.
Christopher Whalen (04:08):
Last book I actually read was the biography came out last year about Edmund Safra. My wife actually worked for him at Republic National Bank and I have just finished my next book, which is a biography of Stan Middleman, the founder of Freedom Mortgage. So again, I'm writing so I don't have a lot of time to read.
Moderator (04:28):
Yeah, remember that people, you're going to get the history of Stan and his empire too.
Mark Calabria (04:34):
So the reason I kind of had trouble immediately remembering it, and Perhaps I'm a bit of an oddity this way, I tend to read like five or six, seven books at a time. I get stuck and I'm like, okay, I'm bored with that. I go to this one, read chapter two, come back and forth. So it's less the last book I read, but more the last book I completed was a Wonderful book On the History Of taxation by Joel, something like Rascals and Radicals And revolutionaries. Again, history of taxation, but actually Quite interesting.
Christopher Whalen (05:06):
Oh, actually you just reminded me. I just reread The Little Prince, which is one of my favorite books.
Moderator (05:12):
Nice. All right, I'm going to keep going. I'm going to shift gears. Will Republican win the White House in 2024?
Mark Calabria (05:19):
I mean, we're here in Vegas. I wish I knew. I truly believe it's 50 50 At this point.
Christopher Whalen (05:25):
I think the Republicans, if they can convince Mr. Trump to, or President Trump to retire, have a better shot.
Moderator (05:34):
Rates above or below 7% by December 31?
Mark Calabria (05:38):
On average, I think they'll stay above seven and I think they may get close to eight.
Christopher Whalen (05:43):
I would say the industry is going to take mortgage coupon rates above eight because that's the only way they can make money. If you're writing a seven and a half today and you're selling it into a six and a half mortgage backed security, you're losing money. So the market is still equalizing from the fed's actions several years ago.
Moderator (06:04):
We're going to get into this in the next segment, so we'll go deeper on a handful of these. Again, one phrase for now, we'll, GSEs remain in or exit conservatorship between 2024 and 2028.
Mark Calabria (06:19):
Wow. I'd have to say unlikely.
Christopher Whalen (06:24):
I think they will have to remain in conservatorship because the market has changed and the model hasn't. So we need to actually fix that before we even think about releasing them.
Moderator (06:36):
Another full segment we're going to do here in a minute. What term captures your sensibility more non-banks or shadow banks?
Mark Calabria (06:45):
I think the non-bank is more descriptive. I mean the shadow is almost, it's meant to be quantitatively negative in a way. So I think that's why I almost never really use the Sure. Shadow Bank.
Christopher Whalen (07:00):
Yeah, shadow Banks is deliberately pejorative. It's what arrogant economists like to say, but the truth of the matter is non-bank finance is why the US economy is so dynamic.
Mark Calabria (07:12):
Why don't I ask you this one, which do you prefer? Free speech or dark money?
Moderator (07:17):
I ask. The way you answered was the reason I asked. It's out there and it's one of those terms and it's largely pejorative. I was just testing and getting the tone set. All right, so last one and then we will get into the weeds on some of these. Would you call FHA loans as well as high L-T-V-G-S-E loans more inclusive or more subprime?
Mark Calabria (07:44):
You can be there. Is the term predatory inclusion? I mean, I think a lot of what FHA does I worry about of sustainability, but again, there is a fine line.
Christopher Whalen (07:57):
The Ginnie Mae market is 2.3 trillion. Today is too big. Obviously this is where subprime went, but it's full dock subprime. The problem is, is that the government guarantees denote, so investors have no problem, they don't worry about it, but what do we do to a family if we put them into a housing market today at the top of home prices and in five years from now they're underwater and they end up going through a bankruptcy? Do we do them any favors by focusing on inclusion at this point in the market?
Moderator (08:33):
So I'm going to come back to that one. So let's go right into the market segment and then we'll come back to that one and then I'll loop you in. Why don't you just go and then we will use this as our segue Into our market segment.
Mark Calabria (08:44):
Yeah, I think part of the tension in Washington, I certainly felt this in the job, and first I'll say I'm very proud of the fact that the largest annualized increases in home ownership and minority home ownership under my watch. I'm not taking credit for it, but home ownership went up. But I think one of the tensions is that the fundamental obstacle to getting a family in a home today Is very rarely on the mortgage side. It's finding the house that they can afford and there's just too much tension in Washington where the sense is that we're going to make the mortgage market and mortgage policy the answer to all these other unrelated things which are real. There are very real social injustices we should fix, but the mortgage market is not the solution for all them. And I worry that mortgage policy bearing the weight of trying to fix a number of things that really have very little to do with the mortgage market is a mistake.
Christopher Whalen (09:38):
Exactly.
Moderator (09:38):
I want to put a pin in this one. I want to do it in a different segment, but there is one thing, unless we want to do it now, but you said something really interesting in the past.
Mark Calabria (09:48):
Occasionally.
Moderator (09:49):
About the OECD and where the US ranks in terms of OECD in terms of home ownership rates. It's kind of middle of the road.
Mark Calabria (09:57):
Absolutely.
Moderator (09:58):
Despite the Fannie Freddie assistance in America.
Mark Calabria (10:03):
Again, it gets to the kind of point and several years ago before last time I was at Cato, did some statistical work to try to look at this and what are the drivers of home ownership across countries? And honestly very little of it, only a small sliver really gets back to the mortgage market. It's things like the demographics, household structure, income growth, and of course there's some historical things. I mean, Germany has a historically low home ownership rate. For instance, Italy has one of the highest, and of course it's because housing is much more cheaper. So again, it's just to remind people that despite what we may have, and it's a mortgage market, your mortgage finance system is maybe number six or seven on top of things that actually drive your home ownership rate.
Moderator (10:48):
I'm going to bring you in on the affordability part that you left off on, but let me back up for a second. Go back to rates. So seven and a half percent this week. We hit it late October seven and three eighths. So we've been kind of tracking seven and a half. So this goes to maybe what both of you're implying that are we going to eight? So can you just comment a little bit on some structural things that take us to eight potentially and for how long?
Christopher Whalen (11:14):
Yeah, I think we are, even though the agencies and the FHA subsidize the cost of mortgages, that's really what they do. It's not about getting the mortgage, it's about how much does it cost every month, which goes across every product in America. But the trouble is is that the Fed's actions during Covid distorted the market so much that lenders are losing 200, 250 basis points on every loan they make. And by the way, they have negative carry, so they're not even making money on the carry because the coupon is seven something. They're paying SFR plus two for warehouse funding. They don't even keep the loans now. They just literally sell them. They don't even try and do their own pools. So I think if the Fed keeps rates where they are today, then I think you're going to easily see 8% mortgages because the survivors in the mortgage market, once we get rid of another 50% of capacity are going to want to make money. And that's how they're going to do it. Because remember, lenders put coupons on loans. Investors decide what a mortgage backed security is worth. Those are two different worlds, primary and secondary market.
Moderator (12:28):
And then just to stay with the Fed, with the Fed's influence on this for a second and then maybe come back to MBS Diamond. I saw a headline this morning on Bloomberg saying that terminal rate of potentially seven and we're at five and a half now, do you believe that?
Christopher Whalen (12:50):
It's very hard for the Fed to drag the Fed funds rate up? You notice how long we've been loitering in this five and a half range. And I think that's going to continue because there's still huge demand for treasury securities out, not just in the us, all over the world. So they're pulling yields down even while the Fed is trying to move this narrative that says, well, rates are going up. We're going to kill a little bit of demand and get inflation under control. It's not working. I actually asked Neil Kashkari this on Twitter today. I said, you're writing about why you think we may have a soft landing or a hard landing, but how did you even know that you're having an effect on inflation right now? And the answer is they don't.
Moderator (13:33):
Right. So just one more quick segment on inflation then. So you're at 3.7% on headline 4.2 on July PCE. We get August PCE this Friday. Do you believe that if inflation, those two marks kind of start tracking just at or even just below three that the MBS market starts to rally? Or is there some other catalyst for the MBS market to rally that nobody else is thinking about right now that would actually maybe bring rates the other way and maybe reconcile more with Fred and Tony or Duncan, which respectively are calling for 6.3 and 7.1% by year end?
Christopher Whalen (14:12):
I think the only thing that could change the Fed's course, which is to leave rates where they are at least for another year, is if we see another surprise bank failure that will force the Fed to fail or to fold.
Moderator (14:26):
Since Las Vegas fed rates. Yes, but are you also referring to MBS rates?
Christopher Whalen (14:30):
Oh, they'll follow. If the Fed drops fed funds, you'll have a point pick up and mortgage rates.
Moderator (14:35):
But if inflation drops and the Fed holds, do you believe MBS puts on a rally?
Christopher Whalen (14:41):
Well, they may, but they'll be disappointed because the Fed is going to wait. Chair Powell made a terrible mistake at the end of 2018 letting the market seize up. They weren't managing reserves properly.
Moderator (14:55):
Right?
Christopher Whalen (14:56):
So, they decided to go big in the economist lexicon and now we have a situation where they're going to keep rates high to make sure they get rid of inflation, but they're not selling any bonds. We're only going to do 1,000,000,000,006 in new production this year. Maybe. Why aren't they selling bonds? They're afraid to take liquidity out of the market.
Moderator (15:17):
Yeah, okay.
Mark Calabria (15:18):
I would agree with that. And again, it's worth remembering that since the Fannie and Freddie wound, the conservatorship in 2008, somewhere in the neighborhood of two thirds of all agency MBS have been bought by the Fed and they are the big gorilla in this market. And even if they don't sell, which again the liquidity issue, but they certainly don't want to recognize the market to market losses, that doesn't mean they're not going to let stuff roll off. So I do think that for good or bad, we are in the world where the Fed drives a lot of what ultimately happens in the MBS market. I talk about this a little bit in my book, but obviously during the conservatorship you've seen a cap in the portfolios for the GSEs and weened the debate how much this moved rates, but certainly pre-con conservatorship, if the spreads between their bullet debt and the MBS got too crazy, they went into the market, tried to behave quasi, play the role of market makers sometimes in their own debt. And obviously they're out of that now.
Christopher Whalen (16:14):
But here's the thing, Mark, if they don't sell bonds, if they just keep rates high to get back their credibility on inflation, the losses that they're going to run. Are going to be just as bad as selling the bonds. I think we'd be better off selling the bonds and getting this thing over with quicker.
Mark Calabria (16:33):
I'm with you, Chris, but I've long said that a pretty much iron rule of Washington DC as if there were two economically equivalent ways of doing something, but one is more opaque and less transparent than the other. Washington will always pick the more opaque way.
Moderator (16:49):
But also let's bring this back to affordability. So if by that logic you're saying, Hey, forget adjusting the overnight rate, let's talk about selling the holdings more aggressively, does that create even more rate shock? We blast the rate or worse, we already have an affordability problem. So let's come back to affordability then for a second.
Christopher Whalen (17:13):
No, I think the FOMC could easily instruct a fed in New York to make sure that they hit the 35 billion cap every month. They're at half of that now. The market wants to paper. That's what you see in both the 10 year and the 30 year they keep coming down in yield because there's so much demand. And remember, the dollar swaps market is trading 30 basis points rich to treasuries right Now what does that mean? It means the Chinese want collateral. Everybody always talks about the Chinese selling their treasury bonds. No,They've already pledged those bonds on a dollar swap.
Moderator (17:50):
One connection here. This was a while ago, but you were one of the people who pointed out that Paulson and TARP and that whole program was really foreign policy and related to this was a different context completely, but What's your opinion on Chinese holdings of these US assets?
Mark Calabria (18:11):
I don't want to almost sound like my friend Bob Lighthizer or even sound like Trump in this regard, but clearly what is going on that people don't necessarily mention when we buy products from China, we're giving them dollars. Now my preference would be I'd rather have the Chinese use those dollars and buy American soybeans or American cars and instead they roll it into primarily treasuries and agencies to park their currency and it's done. They do this less than they used to, but it's done with the explicit target of trying to suppress their currency relative to the dollar which costs American jobs. And so to me, you have to recognize that our financial system and our trade system are two sides of the same coin and we're not going to be able to deal with trade deficits and imbalances with China unless we deal within the financial side as well as on the economic side. Now what you and I were talking about a bit earlier is the part of the conservatorship of Fannie and Freddie were in 2008. There was a very real risk. And so for instance, Russia went to China and said, would you work with us as a coordinated dumping our agency holdings so that we could spike mortgage rates in the us? And so there are foreign policy components. I think we want to ask ourselves, how much do we want to have China and the rest of the world ultimately deciding what our mortgage rates.
Christopher Whalen (19:29):
Mark, the Japanese live by Chuan Bank would buy the whole position from China tomorrow could dollars are fungible. So let's say they said, well, we're not going to buy treasuries anymore. They put them in the bank in cash bank CDs, but somebody is going to invest those CDs in treasuries.
Mark Calabria (19:47):
I don't disagree with you. I mean my inner economist is simply a reminder here that having the dollar be the global reserve currency of the world in which the primary assets or treasuries and agencies is not free to us. It's got benefits, but it's got costs and we should just be more transparent with the American public.
Christopher Whalen (20:05):
And housing is whipsawed by this fact. Exactly. I mean, think about the way the Chinese not just play the games Mark described, but then they recycle those dollars back into their own economy and create a housing boom that makes us pale in comparison. I mean they use leverage in China. The Japanese would even be terrified of this and they're known as being great gamblers. So the Chinese imitate us and then they add 10 or 15 or 20 times leverage and you have what you see today.
Moderator (20:38):
So to bring out this segment and then we'll move into the covid response segment and your FHFA if foreign selling of treasuries and MBS is not a black swan event, is there any black swan events that we're not thinking about as it pertains to rates in the housing market in general, especially rates.
Christopher Whalen (20:59):
I think the only way the industry is going to get back down the six or six and a half percent mortgages as if we see another surprise in the banking market and the Fed is going to be forced to back off. I am very concerned about the fact that interest rates are making asset prices go down. That's an environment where the FDIC cannot sell failed banks. So you have the bizarre specter of Bank of California, which is just barely $10 billion going to buy Pack West, which is kind of 40. We're not sure and it's wonderful. We have Warburg Pincus and center view involved, but is this the best we could do? And the answer is yes. The answer is there were no other buyers. So if we see another failure, they are going to probably have to turn the treasury for support or tax the industry to raise cash because there won't be three or four buyers out in the room saying, Hey, we're ready to take it at a 30% discount.
Moderator (22:03):
Commercial real estate is probably the biggest stressor of regionals. True or not true.
Christopher Whalen (22:09):
Very true. You see it in the newspaper every day.
Moderator (22:12):
So does that mean then that we still have these dominoes to fall in the regional sector and it's going to be like it was in March where it's like these rolling mini crises in regional? Is that how you see it or is there going to be a big event?
Christopher Whalen (22:26):
No, no, no. Commercial real estate is like chopped salad. Okay. Every asset is different. Every asset has a different story. So for example, the journal at a piece this week about Atlanta, who would've thought, isn't Georgia growing really fast? No, people don't want to go into the office. So in those cases, those city urban legacy assets are going to take a hit.
(22:50)
You see it already. On the other hand, there's an awful lot of commercial outside of the cities. It's doing just fine. Banks have the ability to slow walk delinquency in commercial in a very different way than they do with residential assets. Why? There are professionals on both sides of the table. Mostly they want to keep the asset, but we're going to have to wipe out the equity in many cases. And here's the problem. You ask the manager, okay, I'm wiping you out. You buy the debt back at a discount and then you say you've got to put more cash in. This is an asset class. It has gone up for 75 years and each time it came due, we just did interest only and we rolled it and then we marked up the price of the asset. Right? Now we have the opposite where asset prices are falling. You already have developers, especially in multifamily who got kicked around during Covid. Nobody was shedding any tears over landlords for apartments when they weren't getting paid. So these entities are already weak. And then the bank comes to you and says, we're happy to roll your mortgage, but you've got to put another 30% equity into the building to keep it at 50 LTV. That's the problem.
Moderator (24:05):
Got it. Thank you. I'm going to shift gears now. Let's go to some of the covid responses, some of the stuff you cover in your book, but there's stuff we wanted to call out on stage here because it's very instructional for having AGSE future discussion, right? So the upfront forbearance and refi incentive that you put in place was unanimously successful and appreciated by consumers servicers, everybody, right? So talk about it for a second, and I do want to know, is this thoughtful triage or is this policy that was in the works for a long time, but just explain exactly like everyone knows you could get into forbearance easy, but how do you get out?
Mark Calabria (24:46):
Actually, if you think about it, you think about the way particularly the CFPB has handled servicing post do Frank was it was a very paperwork intensive exercise. And in fact our approach was, and again, I was good friends, still good friends with Kathy Kreer, who I personally think did a great job at CFPB, didn't do everything the way I would've done it, but that's fine. And I called Kathy and I said, listen on the GSC book, we're not going to do the paper chase of last time. We're going to let servicers get people in. And our initial plan was to qualify you three months later, which the CARES act changed. That was complete contradiction to the framework CFPB had contradict had constructed, and I said, this is what we're going to do. I would like you not to go after servicers for Cooperating with us.
Moderator (25:38):
And just to clarify, because some of these folks are FinTech folks that don't get into the weeds, but what? You don't have to wait 12 months. You only wait three.
Mark Calabria (25:47):
Okay, A couple of things. So let me a couple moving pictures. First we started our forbearance berg. It was about three weeks before the CARES Act. They were probably three or four things that Congress decided to do differently. One of which our plan was get people in, call them back three months later. So get them in and then validate and come at everything else and hardship as opposed to the way it was done 2008 was validate hardship and then get them in. That's one difference. We were going to do this every three months and of course Congress came in and said, oh, well 12 months. So that was a bit of a change. But a big part of this was a lot of the real concern post through 2008 was that servicers were not fully, completely or even fairly documenting hardships in AMP and HARP and these other programs.
(26:33)
And so you had this whole litany of Dodd-Frank servicing rules that came out of CFPB. We threw that aside and said, that's way too complicated. Unfortunately, CFPP went along with this CFPP could have said, well, we're going to still go after the servicers. And of course my view would've been that would've been a disaster. But you had a real willingness on Kathy's part at that time to work with us and recognize that this had to be done cleanly quickly. Now certainly there was a difference in 2008. A lot of people were mad at their bank and mad at their lender for a number of reasons. Some legitimate, some not legitimate. So we certainly worried about whether people would take advantage of it, who needed it, but we really felt like there just wasn't the kind of time the servicers we talked to, for instance, in March April, 2020, there were backroom operations in India. India shut down even quicker and more dramatically than we did. And so what I was hearing most people tell me is their efficiency of their operations was off 25, 30%. So our ability to just crowd them wasn't even there. So I think the only choice we really had was to take people at the word and get them in and come back later. This was something that we did some conversation. It wasn't something off the shelf. I think it was the right decision. The pandemic. I do worry that I don't think it's the right situation for every potential delinquency of future.
Christopher Whalen (27:58):
Of course, not exactly in the background enabling this. Were two players. The industry who said, okay, fine, we're going to deal with this even though we're not being compensated.
Mark Calabria (28:11):
They worry about that.
Christopher Whalen (28:11):
It's fine to talk about digital mortgages guys, if you're talking about originating a mortgage or maybe even using digital for performing loans. But once you're dealing with a loan that's delinquent, it's a whole, you have to handle it by hand. So you had the industry step up and say, fine, why did they do that? Because the Fed had drop rates so low that the cash flow that was coming in the door from refinance transactions funded this whole thing. So you wind the clock back or forward two years later after covid, they adopted all of these policies which basically say you're going to give that borrower at least two shots before you send them the foreclosure. And that's not necessarily a bad thing because you don't have a buyout of a loan in a pool. You modify it first today, believe me, that's a big deal. Jenny May is actually allowing issuers to leave loans in the pools because they know the issuers don't have the money to buy them. Totally different situation than we were in 36 months ago, mark.
Mark Calabria (29:20):
And that's an important part of this. So for instance, usually you had to be current 12 months again coming out of a forbearance. And one of the things we changed in 2020 was to say, well, first of all, to say if you were current all through out your forbearance, which was about a fourth to a fifth of borrowers, actually paid their monthly payment throughout forbearance.
Christopher Whalen (29:41):
That's right.
Mark Calabria (29:41):
We said, the second you exit, you're eligible to refi. And then for those who weren't, we said the second when you paid three months, you were eligible to refi. And so we had a really big carrot because of the rate environment. And so part of the conversation, the book is here were circumstances in 2020 that were unique, that demanded and supported a unique response. There are elements of this that aren't going to be appropriate in your run of the mill recession.
Moderator (30:09):
So credit where credit is due and the rate market cooperated, right? Absolutely. But reducing that repayment like the on-time payment period from 12 to three worked in the context of the rate market. But then deferrals, here's a great example of something that I completely agree with you if you said it before, but I'm just going to clarify and see if I interpret it correctly, that now it's basically permanent policy. It's not triage or stepping in when the GSEs are supposed to step in and carry the ball for a while. But this is the crux of the GSEs in general.
Christopher Whalen (30:46):
No, but they do have to step in. They have to reimburse the issuer after the fourth month. And this is very important because if they don't, well those issuers may not be able to handle it. So that's a burden for the GSEs. But the other thing to keep in mind, remember is that in the trade off between the Fed dropping rates and providing this tidal wave of cash, which allowed us to deal with covid, well, we also forced home prices up 30% and we shot affordability in the head.
Mark Calabria (31:17):
True. And so again, part of the point of the book and the top of that story is to help, is to try to push a conversation to think about what are the things that should stay, what are the things that changed? And for instance, I'll give you an example, and again, we paid for this during the time. There were about 200,000 Fannie Freddie borrowers in March, 2020 who were already Sealy delinquent in some foreclosure process. Many of these bars hadn't paid in a year or two. If you add in today FHA, you probably have 350, 400 borrowers who haven't made a mortgage payment in probably four years.
Christopher Whalen (31:57):
Right?
Mark Calabria (31:58):
It's hard for me to really see a lot of those people getting back on their feet.
Christopher Whalen (32:02):
Well, because the banks and the non-banks have been terrorized by the CFPB, so you know what they do? They just modeled the loan again.
Mark Calabria (32:10):
Exactly. It's extended and pretend.
Christopher Whalen (32:12):
And if they can sell it into another pool even better.
Mark Calabria (32:16):
It also gets back to the affordability. And let me first say, obviously every foreclosure is a tragedy for the family involved. I in no way ever want to minimize that, but worse than that is a system where you can never foreclose. And, We're headed that direction where you can't foreclose ever. You have a tremendous amount of shadow inventory. So I mean, prices are kooky because you've got a shadow inventory of people who haven't paid in years, but that isn't entering the house price system. And then of course, the rate environment's keeping a lot of houses off the market. So part of the unaffordability in prices is a combination of the rate lock, but it's also a combination of we frozen all of the distressed real estate that would otherwise enter the market and be for sale.
Christopher Whalen (32:59):
But think about the bottom quarter of the population. Mark, especially at FHA. The FHA delinquency is still below 10% today. But if you look at that bottom quarter, it's in the mid-teens.
Mark Calabria (33:12):
Yes, it is.
Christopher Whalen (33:13):
And these are the people who had a hard time during covid, they had employment issues, whatever, and they're going to get kicked around again if we have a recession.
Mark Calabria (33:22):
Chris is getting to what I think is a fundamental point, probably the most important point of mortgage finance policy in my opinion. And I'll put it in context by saying one of the very pleasant surprises I had at FHFA director is walking in the door and really looking at Fannie and Freddie book. I was overwhelmingly astounded by how much of the book was really rock solid when you look at it. And so that's a great thing. Ultimately, the problems in your mortgage market remind everybody, even throughout 2008, the median borrower paid. And so it's never really about how much equity is in the system because we're not sharing our home equity. It's not about the average borrower, the problems you get in the mortgage system or about that 5%. That's where the problems are. And of course at FHA, I mean FHA, it's more like 30%, but you just have that sliver. And one of the reasons I think that the Fannie and Freddie book did better during COVID was we spent the year, we spent 2019 tightening underwriting standards at Fannie and Freddie. So then when the crisis hit, which of course we didn't know was around the corner, you had borrowers in much better shape. So there was much smaller terrorist in the book.
Christopher Whalen (34:34):
The politicians can't help themselves.
Mark Calabria (34:36):
I know they can't.
Christopher Whalen (34:37):
As I said before, Ginny should be half the size it is today.
Moderator (34:43):
So let me just, I want to get two questions out that are part of GSE policy. So one's for Mark, one's for Chris, but then you guys go back and forth. But Mark, you've said we need to get, and I'm going to just say this very specifically, FHFA, out of the job of mortgage pricing, set parameters let companies price themselves. You've also said it's appropriate for GSCs to raise G fees and LLPA to build capital to prepare for downturn. It's their role. I agree. But how do you reconcile those two views?
Mark Calabria (35:16):
They are different. They'll quip about where you stand is where you sit. And so if you sit as a regulator, ultimately I don't think a regulator should be driving prices. And in fact, when I walked in the door to FHFA, the regulator was telling Fannie and Freddie what their target ROE was. That's ridiculous. It's not my job to tell you what your ROE is. We made almost no changes other than the adverse market fee. We started a review process. Lynn Fisher, who I brought over had been at MBA. We started a review process to look at all the pricing with the objective of giving the pricing back to Fannie and Freddy because ultimately the real problem with the conservatorship, it has eroded any sense of distinction. I make the joke in the book that it took me six months as director to stop saying we, in regards to the Fannie and Freddie, it's not we, it's me, it's them. And that's fine because again, we're not all supposed to play the same role. Regulators have a different role than the industry. But again, I think you've seen the conservatives really just eroded that and you see such a micromanaging of it and a politicizations of it that I think is extremely unhealthy and it's an important reason for any of the conservative.
Christopher Whalen (36:27):
Look at the cash window Mark. The politics in the Biden administration have gotten at a point where issuers are basically being told, we don't want to buy loans. If you don't bring mission loans, you get punished. And the truth of the matter is that most LOS most underwriters have a duty of care to the borrower. You're not going to put them into a product, the GSEs, if they ought to be in the FHA. That's it.
Mark Calabria (36:55):
Yeah. But to answer the second part of your question, so again, it's not the regulator's job that tell what the pricing is if you're a CEO at one of these companies, and you can ask that David Brickman, how much he liked being the CEO at Freddie, everything he was doing, being micromanaged. I'm sure DeVito, it sucks being a CEO, being micromanaged. And I know that as somebody who micromanaged those CEOs. And so I get it. And if you're one of those CEOs, you want to get out and it's better for the company. And at the end of the day, if you're, I was a CEO at one of these companies and I had the freedom to do it, I would jack up GFE so I could build capital so I could get out two or three years earlier than I would otherwise because again, it sucks being in conservatorship for these companies, at least at the top level, they do not enjoy it.
Moderator (37:41):
So let me kind of thread this one over to a similar statement. Similarly thematic statement. You've said, Chris, that what lenders care most about for their consumers is price parity. So do you have price parity with or without the GSEs via banks or non-banks?
Christopher Whalen (38:02):
The banks are really interested only in prime larger loans. Think about the top half of the Fannie Freddie market and in loans that are bigger, can't do that. The non-banks are in a totally different world. Most of them will do conventional loans because they like the volumes, but the execution is bad. They will make money in the government market, but if interest rates go up, then they have lost mitigation issues. So it's a changing equation. I will tell you that the smartest issuers in the market that I know have been backing away from the conventional market for the past year. Why? Because they don't want to underwrite mortgages from now to say 2026 or 27 when you have a real reset in the housing market. Imagine the fed drops rates in two years. We have a little boom volumes go back up above two or two and a half trillion home prices go up and then misery on the eighths. We have a reset very similar to what we saw at the end of the eighties, very similar to what we saw after 2008. And people, they're surprised when I say this, but my friends in the business are all waiting for this. They're waiting for the boom when the fed drops rates and then they're going to look for a correction.
Mark Calabria (39:23):
So I think there's two lenses on price free that you need to think about. There's the non-bank bank price ready, but there's also price parity within the non-bank system. And for those of you who've been in the industry for a long time, remember the days when countrywide would come in and get 12 basis points and you would pay 20. And so there was a tremendous amount of industry consolidation and volume discounting driven by the GSCs, pre-con conservatorship. Now that hasn't completely gone away, but it's mostly gone away.
Christopher Whalen (39:55):
Sure. Because the big issuers have market power.
Mark Calabria (39:57):
Well, it's also gone away partly because of the way the conservatorship has functioned. So we pretty much said you had to have equal pricing. We even said you had to have equal terms. We even said that, okay, you want to roll out a pilot If you're going to do it with five lenders, you either need to end it or extend it. You need to get everybody in or even no special deals. And this is a problem that I think only Congress really can't fix, but I'm not dismissive of the danger that posts conservatorship, Fannie and Freddie go back to their old ways of buying volume in a way that will discriminate between non-bank lenders. That's a real fear. And I think only Congress can really kind of come in.
Christopher Whalen (40:38):
But you have a situation now where the home loan banks are buying production from banks. They can't face the non-banks. The non-banks are left dealing with the cash window.
Mark Calabria (40:49):
So Chris is getting any other parody question. I talked a little about the parody within non-banks and the parody question between banks and non-banks is Chris has really talked about that. I agree with. It's predominantly but not exclusively a non pricing issue. And so to me, Fenny and Freddie have the ability to raise costs 5, 10 basis points. No one's going to like it. But at the end of the day, the market share from non-banks.
(41:17)
Wouldn't see it shift back to banks. And the best illustration of this is pre-con conservatorship when the average G fee was fairly low, a third of what it is today, fee and Freddie are much more expensive proposition today. And yet the non-bank share has grown over that time and the depositories have stayed out for a number of reasons. So this is not to say that be blase about it, but I do think ultimately that the industry from the non-bank side, the faster Fannie and Freddie build capital, the less political they become. And so it's important. If you want to take the out of politics and you don't want to have every decision driven by changes in administration or all sorts of other social goals that end up falling down on the originators, then the most important thing you could do is help them get capitalized and get out. And the quicker that happens, the better for everybody.
Moderator (42:09):
I think a great takeaway there is that even if G fees go up to stabilize the GSEs and maybe ultimately get them out of conservatorship, the non-bank sector and all its growth doesn't go to hell.
Mark Calabria (42:21):
Correct.
Moderator (42:21):
I think that's a great takeaway for this crowd and for the industry as a whole. We have a few three minutes left, so I want to do some tech and innovation stuff to kind of bring us home. So is it the job of a safety and soundness regulator to innovate?
Mark Calabria (42:44):
I'm going to start from saying if you run a big financial services company and your Chief risk officer constantly gives you the same answer as your Chief Marketing and Sales officer, one of them not doing their job in its appropriate. Chris and I sometimes like to talk about founding fathers government. I'm a big fan of checks and balances. The role of the regulator is to be a check and balance. They're not there to be your friend. They don't need to be hostile. We shouldn't have a world where they presume you're guilty. But really the role, the regulator is to set the parameters and make sure that when the private sector does innovate, which is where the innovation should come from, it's not a threat to safety and soundness. It's not a threat to consumers. So I am very skeptical of thinking that the regulator should be the driver of innovation because again, the safety and soundness regulators job at the end of the day is safety and soundness.
Christopher Whalen (43:40):
But at the same time, they are driving it. They are driving innovation in part because of changes in law and regulation, particularly things. If you look at the new quality control QC rules coming out from the FHFA, they want people to do QC pre-close. They want the lenders to retain all of the information used in the underwrite of the loan. Most companies in this industry can't do that.
Moderator (44:08):
But that's where the FinTech sector comes in and says, Hey, we can help solve for this. And then programs like D one C and AIM are like, all right, then let us vet it for you and make it work. And does that work or do you not agree with that being a working model?
Christopher Whalen (44:23):
I don't know if that's the proper model. I think in this industry, and I've worked on a lot of industries as a banker, there really isn't enough money to fund CapEx. So ultimately I think we're going to go to a model where we're going to have a couple of essentially outsourced curated processes that go from point of sale all the way to the sale of the loan. It's going to require that all of the data used in that process be retained and deliverable upon demand. And the vendors today are not in a position really to address that. It's almost like we have to tear up all the roads and the abutments in the bridges to make room for more liens.
Moderator (45:09):
So one minute left. Both of you, does that mean big tech only or does it mean much smaller overall open tech comes in and does start repaving and rebuilding?
Christopher Whalen (45:21):
No, it has to be small because if you look at the history of this industry, look at Fiserv, look at Core Logic, look at Black Knight, where they came from. The big firms want to get out of mortgage because they trade at much higher valuations, much higher PEs. Fiserv has been trying to get out of mortgage for 10 years and they still can't do it. So it's going to have to be smaller firms, the only ones who will take the risk of such a cyclical interest rate correlated industry.
Moderator (45:52):
We're close to time. I will give you a remark there, but I got to say that's a pretty great last word for a bunch of FinTech companies that are listening to the future of this industry.
Mark Calabria (46:03):
Let me say I largely agree with chris.
Moderator (46:05):
30 seconds.
Christopher Whalen (46:08):
Largely agree with that, that I do think you're going to see a lot of firms wanting to diversify outside of the mortgage space, partly for the better multiples. But I do want to clarify that to me just because I don't think the view of the regulators should be to is to drive innovation. That doesn't mean that the current regulators aren't trying to drive their version of innovation. I just necessarily disagree.
Christopher Whalen (46:28):
Seem direct.
Mark Calabria (46:29):
I just disagree with that being their role. That doesn't mean that they're not doing it. And that's separate from, it's one question whether regulators should drive innovation. Another question whether Fenny and Freddie should drive innovation. And ultimately I'm just skeptical of having a concentrated system like that be innovative. I don't think of duopoly as naturally innovative. So again, I think the mortgage sector is one that's screaming for innovation. But we need to make sure that it's something where it's innovation that is helpful to the consumer, that is helpful to financial stability. And it's not simply innovation that's putting people out of work necessarily. And I'll leave it with this. A lot of times my conversation on innovation with the GSEs when I was director really sounded like one of two things. One was using governmental advantages to do somebody else's business that they were doing already. I personally don't think that's very innovative, but I understand the attraction of it. And then the other one was to try to remove frictions in the process that were important, counterweights. So for instance, I've run a hedonic, I know how they work, but I'm not ready to get rid of actual appraisals yet. And that's not the view in Washington today.
Moderator (47:42):
And with that said, all these nuances are in Chris's book, which you can grab out on his table. I'm so sorry. Mark's book, that was a great segment for both of you guys. Really appreciate it. So hey everybody, give it up for Chris and Mark.
Are Regulators, Lenders & Fintechs Really in Sync on America's Housing Economy?
October 2, 2023 2:04 PM
48:05