PolicyCast: Enhancing Stability, Affordability in Housing

Kirk Willison, Arch MI’s Vice President for Government and Industry Relations: Over the course of now 20 Arch Mortgage Insurance PolicyCasts, affordable lending has been a frequent topic of discussion with my guests, but few are as well positioned as Freddie Mac’s Mike Dawson to impact both lenders and borrowers seeking affordable loan products. As the Vice President in charge of Affordable Lending at Freddie Mac, Dawson is responsible for managing affordable products and offerings, strategies, research and regulatory compliance — all associated with broadening access to credit. For a company whose mission is to provide liquidity, stability and affordability to the housing markets, Dawson’s role is central to Freddie’s success. In fact, at a time when the chasm between white and minority homeownership is as wide as ever and housing prices are soaring nationwide, it has never been so important. Fortunately, Dawson comes to his current job with deep experience, not only in his field, but specifically at Freddie Mac. He’s been at Freddie for 35 plus years and previously led the GSE’s efforts on technology, data initiatives and structured securitization programs.

Mike Dawson, it is not only great to have a friend of more than 20 years with me here on the Arch Mortgage Insurance PolicyCast, but really an expert and someone who can explain how to make homeownership possible, affordable and sustainable. So, Mike, thank you very much for joining me here today.

Mike Dawson, Freddie Mac’s Vice President for Single-Family Affordable Lending Strategies and Initiatives: Kirk, thank you. And thanks for the partnership with Arch. I really appreciate being here today.

Willison: Well, terrific. Mike, you’ve worked with Freddie Mac for more than 30 years now. Have you ever seen a housing economy like we experienced in this past year? I mean, we had the pandemic economy really shutting down the whole economy. Then we had record-low interest rates. We saw skyrocketing housing prices and a shortage of homes — just about everything but the kitchen sink. How did you manage things at Freddie Mac?

Dawson: Yes, you’re right. I’ve been at Freddie Mac for 36 of the 51 years, so I was calculating it: I’ve been here 70% of the time Freddie Mac has been in existence, and it’s been a terrific career through a variety of different housing markets. No question, it’s gone through a few crises here also, but … you kind of hit it on the head here. Never seen anything like the confluence of certainly the health factors related to the pandemic [and] the work environment itself. Certainly, all of us were working from home during this time period. Certainly, you know, the resilience of the industry itself, of working through these conditions, managing a massive amount of refinance activity in 2020 and certainly going into 2021, none of us have seen anything like that in the past.

And, certainly, from the housing market itself, the run-up in house price appreciation, the demand in housing and then the components around related to supply issues, right? You’ve all seen the lumber price issues. Now you’ve got labor issues and the cost of labor, and all of these factors all at once, as it were. But, again, we’re here to solve problems, right? Provide solutions, look to a brighter future, as it were. And then, you know, that’s what we’re all about, both here at Freddie Mac and certainly at Arch MI.

Willison: Well, your department is really central to Freddie Mac’s core mission to provide liquidity, stability and affordability in the housing market. And let’s leave aside liquidity for the time being, and let’s focus our conversation on those two other factors, the stability and affordability. You know, when it comes to stability, what an incredible difference we saw between the last two financial crises, going back to 2008. The housing-led Great Recession and now the pandemic economy. Really, back in 2008, housing was really following, it was reacting. And as we look in the current environment, you guys among others in the housing market were really proactive. Can you compare and contrast the differences between the two?

Dawson: Yes, you know, a lot of the lessons learned, obviously, in the last housing crisis, is one of how do you react? How do you put policy out in the market? How do you manage expectations of all the partners that we all deal with in these markets? But, it all comes back to the partnership between the lending community, the industry associations, the mortgage insurance companies. We’re all in the same boat here, right? And we learned a lot, certainly in the housing crisis of 2008. We also learned that we have to react more quickly in a number of different settings, particularly the pandemic setting — the changes of interest rates, the changing in servicing related to forbearance provided to those homeowners that ran into economic or other situational challenges there that they needed immediate relief on their mortgages.

You just remember how quickly those new policies were rolled out to the industry itself and the reaction … obviously positive reactions to all of those in the industry to look to help those borrowers. And the massive amount of refinancing going on in this market, right? Any time you can provide a borrower the ability to reduce the leverage of their own balance sheets, right? In the form of lowering their monthly payment, lowering their interest rates or maybe even cashing out a bit of their home equity to do renovation products or what have you. The industry responded very, very well and continues to do so, right? And right now, this year, we’re obviously looking to help those borrowers who may not have participated in … the refinancing so far. And you do tend to get those borrowers with, maybe, a lower balance or they may not be as familiar with those options on refinancing. We’re making a concerted effort to help them understand what options they may have available to them to refinance their mortgage. But it all, again, it comes back to our ability to work throughout the industry and getting feedback from the industry on what could work and what may not work to help solve some of these issues that we saw.

Willison: Mike, let’s talk a little bit more about that. What is being done specifically to help stabilize the borrowers who weren’t yet able to refinance? As we know that Fannie and Freddie …  purchased millions and millions of refinanced loans, and now we have a situation where minority and low-income borrowers weren’t able to yet take part in some of those benefits. What’s being done to stabilize those borrowers and actually make housing more affordable for them?

Dawson: Sure. In a variety of different products and programs and support services, both Freddie Mac and Fannie Mae have rolled out just recently a refinance program, low-income refinance program. Certainly, you know, refinance has been available for all conventional borrowers out there, whether it be through our Home Possible^® programs or the HomeOne^® program and our regular conventional offerings in that space. Refinances were part and parcel of that mortgage option to the borrower. We have rolled out what we’ve called Refi Possible that will be coming out … for applications here in August. It’ll be a program that will provide certain credits to the borrower for those borrowers at 80%-and-below area median income; It’s not quite a streamlined program, but it’s a program that’ll make it a little easier for an individual or family to refinance those mortgages.

You can certainly refinance if you have a Freddie Mac-owned mortgage today or a conventional mortgage. You can certainly take advantage of the conventional refinance offering or even the Home Possible refinance offering out there. So there’s a multitude of different options there. And one of the key things here is to provide information and resources so an individual can feel comfortable and aware to reach out to get more information, whether it be working with their loan officer or maybe even talking to a real estate professional. So, in addition to the product and program characteristics, we have massive outreach efforts in touching real estate professionals, loan officers and others in helping them understand those programs and products as best we can so they can serve and help more directly those borrowers in that space.

Willison: Mike, it appears that the worst of the pandemic is over. We’re beginning as a nation to really come out from under the bad economy and things that really are beginning to pick up. But I know that your work on trying to stabilize the market isn’t really over. There’s still a lot of borrowers in terms of real numbers who are in forbearance programs. And I wonder what is it that you’re doing about that situation to hopefully guide those people back into a healthy financial situation?

Dawson: In addition to our outreach to all the trusted advisors in the market such as loan officers and real estate professionals, we’re working with our servicing partners who have, and continue to reach out to those buyers who have chosen forbearance and provided the options that an individual can choose, whether it’s repayment plans, whether the deferred payment option, which is probably the preferred option for many in this space. But the key is to get the information and resources available and communication around what those options are. We’re also working with housing counseling organizations. We support and work closely with a group that we call Borrow Help Centers. These are HUD-approved housing counseling organizations that work directly with borrowers, both potential homeowners and current homeowners. And again, helping them work with individual clients or borrowers go through some of the different options that could be available to them to exit forbearance here. So, a multitude of distribution channels here in order to ensure every individual is aware of options available to them.

Willison: Mike, I know that Freddie recently released its Duty-to-Serve Plan for the next three years, and I want to get to that in a minute, but to start off with, why don’t you explain what Duty to Serve is and how did it come about?

Dawson: You know Freddie Mac’s community mission as you mentioned before, Kirk, is the one to provide liquidity and stability to the mortgage markets, overall. And the deep part of engagement and involvement by Freddie Mac employees across the board. And from a corporate standpoint, our mission in serving low- and moderate-income borrowers in underserved markets and populations are part and parcel of the Freddie Mac charter. And so when you look at both from a mission standpoint that drives Freddie Mac, and also from a regulatory standpoint in managing our housing goals. Our regulatory housing goals that support low- and moderate-income borrowers and underserved areas across the country, our duty to serve regulatory activities is focused on three underserved markets: rural markets, manufactured housing and affordable housing preservation.

So, these are markets that are very challenged from a variety of economic circumstances, whether it be due to infrastructure, whether it be due to housing, employment or other factors that Freddie Mac [has] been focused over the last 51 years of supporting stability in all housing markets in all regions of the country. Duty to Serve specifies Freddie Mac deliver a three-year plan. And we’re just coming out of actually our 2018-to-2021 [plan] that was extended to the 2021 plan, and we just delivered our 2022-to-2024 plan, which builds off of the foundational elements on products, programs, services and investments we’ve made in these underserved markets. We’re very proud of the results we’ve delivered so far. Like I mentioned, a number of these areas are challenged from a housing standpoint. And providing the impact that we can from mortgage purchases is a primary focus of those plans.

Willison: Mike, you talked about just submitting that plan from the first three years. What are some of the things you learned that maybe surprised you?

Dawson: I shouldn’t say it surprised me, but one of the key components as we put the original plans together is that we ensure that Freddie Mac employees got to know the various regions and the various markets we were specifying in those plans to support in a variety of capacities. So, you know, what always impresses me is the individuals within these markets, whether it be in middle Appalachia, the lower Mississippi Delta, some of the housing areas that …  are in the U.S.-Mexico border, Native American lands, Alaskan lands and some of these other, again, underserved markets that we’re looking to work very closely with. We have been working very closely with the organizations that know these areas very, very well.

It’s the dedication of those individuals. It’s the dedication of those communities in looking to provide other options. Again, housing is one component of it, but support —maybe it’s homebuyer education, housing counseling or other areas that will help the individual become a successful homeowner, whether it be today or at some point down in the future. But it’s also the dedication of those folks at Freddie Mac in the form of looking to provide solutions to these markets in all the capacities that I mentioned previously. Truly a dedicated group.

Willison: So, you finished one, now you’ve put another. Looking forward, what’s different about this plan than the one that you just completed?

Dawson: Sure. You know, as I mentioned the word impact. As the word impact is driven by our mortgage purchases that support some of the housing elements in these markets, whether it be manufactured housing, whether it be renovation of homes. As we know in rural markets, the vast percentage of those homes in those markets are aged, and you know, could be 50 years or more. And so, the advent of providing financing opportunities as far as renovation goes or other options within there certainly can drive an impact in those markets. You know, the foundational elements that we started off with was in the form of gaining a better understanding of some of the challenges in these markets and designing products and programs that would support the needs that were conveyed to us in these markets. And whether it be in the single-family space or the multi-family space, whether it be a single-family product or LIHTC [Low-Income Housing Tax Credit] investments in those areas to help make a difference with those partners we’ve been fortunate enough to work with over the last three or four years here.

Willison: For years, manufactured housing has been seen as a potential solution to the affordable housing crisis, but it’s never really amounted to very much. And I know that that’s because there’s some certain challenges. And I wonder if you could talk a little bit about what are the challenges for manufactured housing borrowers, for lenders and for secondary-market agencies?

Dawson: Yes. As we worked with the manufactured housing industry, certainly we’ve been long a buyer of real-property manufactured housing over many, many years, over decades, actually. And as many of you know, there’s several different aspects of the manufactured housing business and several different aspects of the homes being built for manufactured homebuyers out there. And one of the biggest areas of challenges that we’ve seen over time, not just over the last three or four years, but over time, has one been of familiarity of the different options associated with manufactured homes. And these could be anywhere from HUD-certified homes to modular homes that are built in a factory, in a climate-controlled building that can provide a lot of different housing options. And so not only in addition to kind of refreshing and fine-tuning our offerings, our financing options in that space, but we’ve also worked with the industry in driving more familiarity [to] the home options associated with manufactured housing.

There’s no single solution to the shortage of housing in the United States right now. It’s a combination of solutions and with those combinations, or it could be a combination of different housing options out there, manufactured housing being one of them, certainly modular housing. We’ve always heard of different styles and shapes of housing. But it is one of bringing together the industry, the whole mortgage ecosystem here, and driving the understanding of what these options may be available and take down some of the perceived hurdles as it were, whether it be familiarity, whether it be help and understanding from an appraisal standpoint, let’s say, of finding what the value characteristics of certain styles of housing [are]. Again, it’s working with the whole industry to ensure that that understanding is there and also the understanding of what we will purchase as an organization. So what liquidity is being provided there? We bought over a $1 billion  worth of manufactured housing, real property loans last year. And all of those loans can be put into an agency mortgage-backed security. So, you got the massive capital markets liquidity provided by mortgage-backed security, security issuance that is supporting the financing of these manufactured homes.

Willison: You mentioned a critical word there. You talked about real property, and I know a lot of manufactured housing is titled as personal property, and it’s been very difficult for lenders and I think very difficult for secondary-market agencies to buy these loans, right?

Dawson: That’s right. And so, you know, our focus is on the real property space. And while there’s generally maybe a 75% to 80% personal property origination of manufactured housing, about 40% if not a little bit more than that 40% … actually, it’s closer to 60% of those personal property loans are where the individual owns and has title to the land and now title to the home. But they choose, maybe, not to combine those titles into a real property loan. And, again, it probably may have been driven by personal preference in that space, but some of it’s also awareness around the different options from a financing standpoint.

Willison: And in fact, I was going to ask you is there a bit of an education effort among manufactured housing manufacturers and lenders to say, “Hey, you can really get a better deal here if you combine these and actually put these together and title it as real property”?

Dawson: Exactly. You know, and again, not everybody wants to do so, and that’s fine. But it is one of the key components of our initial plan, but to provide a view into what options may be available at the individual level, and that’s through a housing counseling organization and working with the manufactured housing industry itself to say, “Hey, there may be options here, there may be a better options based on an individual circumstances,” but it is key [to] ensuring people are aware of it, right? And what those options may be.

Willison: So another facet that you already spoke to on the Duty to Serve is rural housing. How do the challenges that you face there differ from lending in urban or suburban areas?

Dawson: Sure. And sometimes it comes down to appraisal, right? These properties tend to or may have several outbuildings on it, maybe certainly more acreage around it. And they may have different financing needs, accordingly. And there’s a variety of great programs out there, right? USDA programs and certainly FHA programs out there and conventional offerings. And so it is again providing that opportunity in the form of whether it be a renovation product provided by Freddie Mac, our Choice Renovation product. It could even be our Green Choice energy-efficient product that provides an opportunity, whether it be an urban, suburban or a rural setting that provides a different financing option. But I think over our long careers here, it’s always been driven by in the form of, you know, what could be available at the individual level.

Because many borrowers out there, potential borrowers, may not know they could be mortgage-ready, right? And how do you reach an individual in the form of, “Hey, based on your income, based on you know, in this case, debt-to-income levels, your credit scores and other factors, you may be ready to purchase a home. What can we do to help you along that path such that you’re comfortable going down the path and once you purchase a home, you can maintain a good, stable and sustainable homeownership path here?” But again, it comes all back to information around what could be done to support you.

Willison: One of the challenges for lenders in both urban areas and rural areas are low-balance loans. It’s just the case that for loans of less than, let’s say $80,000 to $100,000, a lender can’t make those loans, originate those loans profitably. So, is there a solution that you guys are working with or is there a role for Freddie Mac in solving that problem?

Dawson: You know, you bring up what has been a very challenging economic reality, right? There’s a fixed cost associated with mortgage originations and for loan balances, you know, as you mentioned, $80,000 to $100,000-plus or minus … Within there, it is very difficult from those originations, having talked to many industry professionals all trying to put our head together to solve some of those issues associated with it, it still comes down to an economic challenge. There are through the sale of loans to the Freddie Mac cash window as an example, there’s certain mortgage investors out there who will pay a slight premium for low-balance loans, given some of the prepaid characteristic, low-balance loan  … the prepay is slower than larger-balance loans. It’ just the nature of the coming back to the economics of the loans themselves. And so there can be a premium depending on the markets for those types of loans. That helps, but it doesn’t solve it. So, I’m open to every idea out there that’ll look to solve that real challenge of those low-balance loans.

Willison: Over the years there’s been a real focus from the [policymakers] on accessing credit, credit accessibility. But today, there seems to be a recognition that the biggest problem that we face, and you touched on it a bit earlier, is the lack of housing supply. A recent Freddie report suggested there’s about a shortage of 3 million [units]. The National Association of Realtors® just came out with a report saying that we’re short about 5.5 million homes. I guess it really doesn’t matter who’s most accurate. There’s just the real recognition that there’s a crisis that exists. Can Freddie, can Fannie help in resolving that type of a problem?

Dawson: Our Chief Economist had numbers of 2.5 million back in 2018. They recently updated it to about 3.8 million from a housing shortage standpoint … However, you know, one of those components around access to credit in the form of … whether it be a low-down payment option, whether it be working with state and local housing finance agencies and providing down-payment assistance, our focus is on the financing aspects of it primarily. But then you look at those aspects associated with different styles of housing, right? We talked about manufactured housing. Certainly, what’s going across the country around accessory dwelling units [ADUs], a different form of housing that may solve some other issues, right?

It may be there’s excess property, excess land on somebody’s property today, particularly on the West Coast, that’s opening up additional what’s called ADU opportunities in that space, more housing availability may be closer to where people work. So, we do finance those. Also, we’ve gotten a lot of questions about how we finance it, what opportunities we have in that space. You know, we have construction-to-permanent financing options of that we work with lenders on. We certainly have dialogue and, actually, I just spoke with the National Association of Home Builders last week, who I know you’ve had on your podcast previously. So, it’s working jointly with a number of different organizations and experts across the industry to put our heads together again, to see what we can do to participate in some of these solutions.

But then as you talked about before, the confluence of different activities, whether it be material shortages, labor shortages and other issues that, you know it’s kind of challenging all of us from a housing perspective, let alone an affordable housing perspective. But, again, it’s not for us to, say, “Well, we’re deeply challenged today.” It is to look forward to the next six months and the six months after that saying, “What can we continually improve on to bring in and [convene] different organizations together to brainstorm, to provide solutions that’ll help us work our way through what is going to be challenging next couple of years, at least, related to both affordability and housing supply.

Willison: Mike, that’s a great way to end. Really a collaborative effort is going to be needed from all the participants in this housing and housing finance industries to solve these problems. I really appreciate the taking the time today to join me.