PolicyCast: FHFA Director Shares Housing Aims

Kirk Willison, Arch MI’s Vice President for Government and Industry Relations:

Welcome back to another episode of the Arch Mortgage Insurance PolicyCast. Sandra Thompson was named acting Director of the Federal Housing Finance Agency on June 23rd, 2021, just hours after the Supreme Court ruled that the President has the power to hire and fire the Director at will. She was formally confirmed as Director this past June. In very short order, Thompson made clear there was a new sheriff in charge of Fannie Mae, Freddie Mac and the Federal Home Loan Banks. Out was her predecessor’s emphasis on preparing the GSEs to exit conservatorship. In was a stepped-up effort for the GSEs to advance homeownership opportunities for historically underserved people and communities. A year into her leadership of the agency, I sat down with the director to chat about some of the most pressing issues in housing in America. But first, I wanted to learn how a girl growing up in Chicago came to be the most powerful housing regulator in the country.

Director Thompson, I am thrilled that you are here. Thank you for joining the Arch Mortgage Insurance PolicyCast. I would say that one of the things that I really love to do is to really get a sense of the person that I’m talking to. So, I wondered if we could maybe just start with a little personal history. Where were you raised and growing up, who were the most influential people in your life?

Sandra L. Thompson, Director of the Federal Housing Finance Agency (FHFA):

Thank you for having me here. First of all. I grew up in Chicago, on the south side of Chicago — born and raised. I went to public schools there. My mother was a schoolteacher. My dad worked for U.S. Steel, and that was the primary industry in Chicago at that time. I actually remember when we bought our first house. I was five years old and we had lived in an apartment, and they saved and saved. They moved to a neighborhood where there were lots of other kids. We grew up and took the bus to school. Actually, we had to take three buses and a train to go to high school, and I ended up just having a great time in Chicago. Although I’ve lived in Washington for a little over 32 years, I still consider Chicago my home.

Willison:

And who had the greatest influence in your life growing up?

Thompson:

Probably my parents, my mother in particular. My mother actually is probably the biggest influence on me. She just is a wonderful person. She has a great sense of purpose. She is always volunteering. She was a schoolteacher. She taught first grade for about 35 years and after school she was always involved in a community service project. She had her sorority meetings and they were always doing service projects. We certainly did a lot of service projects at our church, and she was always giving back. And it was interesting because my dad had to learn how to cook because we were always going to different places around Chicago just providing community service. And that’s a big part of who I am and how I grew up. And it’s really instilled in me just a sense of giving back. So, I would say that my mother is probably the biggest influence in my life.

Willison:

Now, you left Chicago, and you came to Washington [D.C.] to go to Howard University. What did you study?

Thompson:

Finance, actually. I started out as an accounting major, studied accounting and transferred my major to finance — and insurance was a minor. They had just started an insurance program, and I learned all about insurance. In fact, I did an internship with Travelers in Hartford, Connecticut. And when I left there, I wanted to be an actuary scientist. So, I was very much interested in being an actuary, and I got a job at Northwestern Mutual Life in Milwaukee, actually working on mortgage systems. I had to take the coding of commercial real estate payments and I had to figure out what the debt service coverage ratio was, what the rents were, what the LTV … and all these mortgage payments. I had to split up principal and interest, and I just had a really interesting time learning about commercial mortgages. I worked there for four years and got married and we moved to New York City, lived in New Jersey and I worked for Goldman Sachs.

Willison:

You obviously would speak the same language of a lot of my colleagues at Arch MI if you wanted to be an actuary. So, from there, [you’re] now a financial institution’s regulator. It doesn’t sound like it was by happenstance. It sounds like you really had the basic training to be able to move into government in a supervisory role.

Thompson:

Yes. I actually worked at the Resolution Trust Corporation, the RTC, and its purpose, as you may remember, was to address the assets that were a result of the failed savings and loans during the savings and loan crisis. In my work at Goldman, I was able to work on securitization for mortgage loans that banks were buying. When I came to Washington, the government was looking at starting a securitization program with the loans that were a result of all of the banks or savings and loans that had failed at the time. There were lots of loans and, long story short, we ended up with three-pronged execution. We had a whole loan strategy. We had a strategy to sell to Fannie and Freddie for those loans that were eligible, and then we wound up securitizing other mortgage loans.

In fact, at RTC we sold over, I think it was $30 billion in mortgage-backed securities. I actually had the privilege and pleasure of working on one of the first commercial mortgage-backed securitization programs. We also worked on securitization for non-performing loans. It was just a really good experience … The securitization program went so well that the RTC had a limited life. It was supposed to be six years, and it ended up being five years because, I think, we did our job so well. We were able to move a lot of the assets off the balance sheet of the government. Many of the people that worked at the RTC then went to work at the FDIC. I started in FDIC. I worked 10 years in resolutions and 13 years in supervision. When I left, I was actually the Director of Supervision during the most recent crisis, the Great Recession.

Willison:

Let’s fast-forward a few years, to when you about a year ago were named the Acting Director. It would be an understatement to say that it’s been a busy year for you and your position first as Acting [Director] and now finally as formerly Director of the Federal Housing Finance Agency. Just to kind of recap, you’ve boosted the affordable housing goals of the GSEs. You’ve required them to submit equitable housing finance plans. You actually rejected their first offering of the Duty to Serve plans, at least the first under your guidance. Together, those are really clear signs that the FHFA expects robust programs to grow homeownership. You now have responsibilities to not only be a mission and goals regulator, which you were to begin with at FHFA, but also a safety and soundness regulator. How do you balance those competing challenges?

Thompson:

One of the things that I know for sure is that safety and soundness and access to credit go hand in hand. And when you think about access to credit, one thing that I learned is that when you’re talking about access to credit, sustainability is the critical component. We have to make loans that people understand and we have to make loans that people can afford. That was one of the great travesties of the Great Recession because many people were able to get into homes, but they weren’t able to stay in the homes. We saw record numbers of bank closings and foreclosures. When you have an unsustainable loan, it’s a lose-lose all the way around. The borrower loses because they have to move and displace their family, investors lose, mortgage insurance companies lose and sellers lose. It just doesn’t make any sense.

Fortunately, we have some policies and rules right now, like the ability-to-repay rule, that prohibits at least Fannie and Freddie from some of those products that were prevalent during the crisis. But I think that, again, making sure that we have sustainable loans is just really important. And it’s my view that the Enterprises are well positioned and they do a really good job in providing liquidity in areas that are easy to serve. I mean, anybody can certainly make and buy a loan that has a 780 credit score, a 60 or 70 loan-to-value ratio and a 30% DTI. That is normal. I think that the objective that we’d like the Enterprises to think about, in addition to doing their bread-and-butter business, is looking at ways they can serve underserved communities.

You know firsthand that when you talk about rural communities there are challenges with appraisals and getting the right comp. We have challenges with manufactured housing … What we found is that the racial equity gap is as wide as it’s ever been, and many of the gains that were made in [the early 2000s] were lost in 2008 and 2009 … I just think that we have an opportunity to take a look at each of these areas where the Enterprises in their mission statements and in the statute basically says they have the responsibility to provide access across the country to all markets. In these areas that are hard to serve, where financing provisions are not as prevalent as in other places, what are there things that we can do to be helpful to move fair housing, affordable housing [ahead] under the umbrella of sustainability? Because everything that we do, we’re doing under the umbrella of safety and soundness.

Willison:

So, the experiences that you’ve talked about, kind of the mid-aughts …  the equity stripping we saw, particularly in minority communities … must have influenced you greatly to persuade the department to come up and say, “We really want the GSEs to create their own equitable housing finance plans. Both want to adopt special-purpose credit programs in order to really tackle this issue.” And those programs would either target certain neighborhoods or certain populations [by] offering special products, services and programs that would really help drive greater homeownership among the disadvantaged communities. “The Wall Street Journal” suggested that this is kind of mission creep for the GSEs. I wondered how do you respond to that type of criticism and what innovations are you looking for out of Fannie and Freddie to really drive new homeownership opportunities?

Thompson:

We are just particularly looking forward to seeing how the Enterprises and the sellers use these special-purpose credit programs to further equity. As you said, they’ve been around for a very long time. I don’t think that they’ve been used a lot. Responsible use of these special-purpose credit programs can really be a key tool to help solve these long-standing housing issues in these specific areas. And we’ve been pretty pleased to see that more and more lenders are adopting or thinking about using these special credit, special-purpose credit programs. One thing I would say is we want to be transparent about what we’re doing. We want to make sure that if there’s a pilot program that people are aware of, what’s the goal of the program? Is it dollar-bound or time-constrained? What is the end goal? And we want to make sure that people really have eyesight into what the Enterprises are doing in this area.

When we are looking at these programs, one of the things that we’re doing is we’re trying to figure out what are the barriers. Why aren’t at least the Enterprises purchasing loans? If you have 100 loans and you know you have two to this demographic and two to that demographic, but 80 to a majority demographic, what are the special circumstances that we need to look at to address these issues? And one of the things that we’re looking at now, and I think you may be aware, but Fannie and Freddie are both looking at incorporating positive rental payments into underwriting standards. And I say that to say that when we see issues, they don’t just benefit a particular community, but they benefit the entire community because the rental positive payment program will assist all renters. You will see a predominance of minority communities in rental housing. But when you’re looking at ways to make things count and be relevant … when you think about it, the mortgage or your housing payment is the largest monthly payment that most people have, whether it’s a mortgage or whether it’s rent. Because rent is not a debt, does that mean that you have somebody that’s been paying their rent for months and months or years and years, and are they able to meet the merits of the 5Cs? Do they have the willingness to pay? Do they have the ability to pay? Absolutely. So why shouldn’t we incorporate these things into how we assess someone’s willingness and ability to pay? And if you think about it, in some of the cities across the country, some of these rent payments are as high as, if not higher, than the mortgage payments.

Willison:

Now, while equity has kind of been a highlight of your term in office, it’s not the only issue you’ve dealt with. Very early on in the term, you reproposed capital standards, standards that had been previously adopted by your predecessor. And one of the big changes there was to increase the use and enhance the value to Fannie and Freddie of Credit Risk Transfer [CRT]. And that’s the idea of taking that risk and moving it into private investors, and I wanted to know if you could just share what your thoughts are, what are the benefits of CRT to the Enterprises, to borrowers and to taxpayers?

Thompson:

Sure. As you know, Fannie and Freddie are the largest holders of mortgage credit risk in the United States, perhaps the world. Right now, to the extent that something catastrophic or something really bad happens, Fannie and Freddie would have to take those losses, and they don’t have very much capital. [This] means that those losses are borne by Treasury, which means it’s on the backs of the taxpayers. So, we really view the transfer risk — particularly credit risk to a broad set of investors — as a really important tool to reduce taxpayer exposure to the risk posed by the Enterprises. And you’ll recall the credit risk transfer program was started in 2013, and there are robust investors that participate in both the capital markets transactions and the reinsurance transactions. We just believe that moving this risk from the Enterprises and the taxpayers to private investors is a prudent thing to do.

We also think it’s really important that if there are unexpected losses — which are the losses the credit risk transfer program is supposed to cover — the taxpayers are covered and Fannie and Freddie are covered as well. We also think it’s a great tool for outside of conservatorship, certainly. You know, interest-rate risk is covered through the MBS and certainly this is the program that covers credit risk. So we just view the CRT as kind of a cornerstone to make sure that the Enterprises’ safety and soundness is safe and sound, the banking regulators are looking at something similar. We just think that this makes sense. So, again, we are focused on safety and soundness. I would also say, and I’m glad you pointed it out … to me, our mission is really important, equity is really important and safety and soundness are as important to me as well. So, I’m just so glad that you asked that question.

Willison:

You’re welcome. Let’s turn to maybe the issue that most of us in the housing industry are talking about, and that’s housing supply … The Biden Administration just about a month ago released its Housing Supply Action Plan. A continuing controversy that we’re seeing is the role of investors in the housing process. So, we’ve heard about a lot of homes that were being converted from owner-occupied homes into single-family homes. To their credit, the investors say that this is a really critical supply source for rental housing while detractors are saying, “Wait a minute. You’re paying cash. You’re forcing people who can’t pay cash out of the market, and you’re removing actual homes that could be owner-occupied.” You took some really early steps at FHFA to extend the Second Look program. How is that going? And second of all, does more need to be done in this regard? Is there a role for the federal government in helping potential homeowners become owners, given the interest investors have in buying homes?

Thompson:

Sure. That’s another great question. We did make a change from the First Look program, and we increased the number of days that owner-occupants and nonprofit organizations could look at the enterprise’s REO properties from 20 days to 30 days. And we think it’s made quite a difference. The issue is between Fannie and Freddie … I don’t think combined it’s more than 9,000 properties. And the supply issue is real and it is very pronounced. So, I think the First Look program really does a lot to help owner-occupied persons or first-generation homebuyers or others. It just gives them the opportunity to have the first look at these properties.

We also, if you recall … four or five years ago, there was a pilot program that both Enterprises undertook with institutional investors. I think Fannie had one program and Freddie had another, and I think the Freddie program was focused more on institutional investors in the affordable housing space. And a Fannie program was focused more on the large institutional investors … Fannie and Freddie do have institutional or investor programs. I think the number of units one single person can buy with Freddie is six, and I think the number is 10 at Fannie Mae. It’s mostly Mom and Pop, but we are not going to allow them to purchase the properties from institutional investors. And like you said, when you introduce these cash-only bids, it really drives up the home prices for these lower-cost starter homes. It also makes it really hard for first-time homebuyers or first-generation homebuyers to really access wealth-building opportunities through homeownership. So, we think we are in the right space.

Willison:

It must be terribly frustrating. I was in Atlanta a couple weeks ago and heard that through last year, 33% of the homes in Atlanta were cash purchases.

Thompson:

Yes, it is a challenge. Are you talking about a first-time homebuyer or are you talking about a renter or someone who’s never been through the mortgage process? How can you compete with cash? And as a seller, certainly you go with the sure thing. So, it really is something that we need to address, and we thought that this increase in the number of days will be a good first step for that issue.

Willison:

You’ve been generous with your time. I have two more questions for you. Let’s look ahead three years. That’s the timeframe [in] which both the duty to serve and the equitable housing finance plans will expire or be renewed … What’s a realistic expectation for the state of the nation’s housing in 2025? And I’ll add to this one. What do you hope will be your most significant accomplishment in your term of office?

Thompson:

I’ll start by answering the last question first. I would want that my most significant legacy, for lack of a better term, to be that Fannie Mae and Freddie Mac and the Home Loan Banks provided safe, decent and affordable housing, and they provided liquidity to all Americans across the country in all neighborhoods, whether it’s tribal, rural, communities of color or pick a place. And that there was equal access to the mortgage market and mortgage credit. And it was administered in a manner that was grounded in safety and soundness, because I do believe that sometimes the message gets confused where people think it has to be either-or. When I say either-or, it’s access or safety and soundness is not [a matter of one or] both. I just firmly believe that both are necessary to be successful. And I would hope that in 2025 that we would’ve demonstrated that we are able to provide liquidity to all neighborhoods, to all people across the country in a way that was safe and sound.

Willison:

Thank you very much for the time today. This has been terrific. Thank you.

Thompson:

Great. Thank you for having me.