In 2012, HousingWire recognized Ed DeMarco as its Person of the Year for his work as the acting director of the Federal Housing Finance Agency. In that pivotal year, the FHFA hired new executives at Fannie Mae and Freddie Mac, revamped the executive compensation structure, set a framework for a single securitization platform, announced a plan to begin credit risk transfer, launched an REO-to-rental bulk sales pilot at Fannie Mae and released guidance on HARP 2.0. And by the end of that year, both GSEs reported a profit.
It was also just one of many years that DeMarco spent a considerable amount of time testifying before Congressional committees. By today’s standards of hyper-partisanship, the Washington, D.C. of 2012 might seem like a slightly kinder, gentler place to do business, but I doubt it felt that way to DeMarco. His work was both hailed and assailed by various housing factions, and the stakes of the FHFA’s decisions couldn’t be higher.
DeMarco is now the president of the Housing Policy Council, a trade association dedicated to many of the same goals that marked DeMarco’s time at FHFA: restoring the private market, modernizing the government agencies involved in housing finance, reformulating Fannie Mae and Freddie Mac, developing a sustainable approach to expanding affordable housing opportunities and cultivating a market environment that encourages and enables responsible innovation.
We caught up with DeMarco this week at HousingWire’s Dallas office, where he recorded a podcast on the status of GSE conservatorship and sat down for a wide-ranging interview with HousingWire reporters and editors. It’s clear that DeMarco’s passion for a level playing field for private capital is burning brighter than ever.
Below is our conversation, lightly edited for clarity and length:
HousingWire: Tell us about the vision behind the Housing Policy Council.
Ed DeMarco: I joined the Housing Policy Council two and a half years ago from the Milken Institute. We have about 30 members and the common theme among our members is that they are all significant players in the ecosystem: banks and nonbanks, all the mortgage insurance companies, title companies, data and tech companies, and settlement service providers. We don’t deal with every mortgage issue that comes down the pike, we are organized around having safe, sound and efficient markets.
HW: What are some of the specific issues you focus on?
DeMarco: One example is restoring the private label market. Last year, I penned an op-ed in American Banker in which I outlined three administrative steps that regulators could take to advance the ball in that direction. One addressed the QM rule, and the benefit Fannie and Freddie receive through that. Another is Regulation AB II [Asset Backed Securities Disclosure and Regulation]. And a third is democratizing all the data Fannie and Freddie have, all the loan data and borrower data. If you want to bring private capital back into the market, you need to have the information to assess the risk appropriately. This is a tremendous area of focus for us.
In October, SEC Chairman Clayton put out an open request for comment on AB II and we are hard at work responding to that. Since they finalized the rule, there hasn’t been a single publicly registered private label securitization. The rule requires an enormous number of data fields to be reported — 270! The intent was supposed to be investor protection, but if those data fields cannot be defined, or if you can’t interpret the requirements, then issuers cannot vouch for compliance with the rule. So, the securities never get issued.
I would point out that pre-conservatorship, Fannie didn’t do loan-level disclosures and Freddie did very little. They have to do some now, but short of a private market, let’s get the GSEs to the same standard as others. If you want to rely on private capital rather than taxpayers and see stability in the marketplace, it’s important that you make sure the market knows what it’s investing in. Investors deserve to have transparent, consistent disclosures.
HW: Some fintech companies and platforms are gathering huge amounts of loan data and borrower data — how does that information play into what investors need to know?
DeMarco: From the angle of what makes the market work, the information that is necessary has to be available to everybody. Otherwise, it can lead to distortions in the marketplace. I think there is much more information out there today than there was 12 years ago, and lots of new firms out there to figure it out. They have certainly advanced the ball, but fundamentally, if you are doing an MBS, there ought to be consistency and transparency on the data on the underlying loans so everybody is seeing the same thing.
HW: When the HPC is evaluating the health of the market — what are you measuring?
DeMarco: We look at: Are we getting outcomes that improve the transparency and competitive nature of the playing field? One example is capital requirements. In the pre-crisis days, there was an extraordinary misalignment of capital requirements across bank and GSE regulations. When FHFA came out with its capital proposal in 2018, there was still a significant gap between bank regulators and FHFA. If FHFA is right in its risk assessments, then the mortgage capital requirements in bank regulations are excessive. If the bank regulators are closer to the actual risk, then FHFA’s proposal was inadequate. And the FHFA and bank regulators don’t treat counterparty risk and systemic risk the same way.
Another outcome is we think disclosure standards should be comparable. We have an $11 trillion single-family mortgage market — that should not be going through just one channel or entity. We are looking for a more level playing field that allows for different executions but the disclosure requirements to investors should be comparable across channels.
On the common securitization platform, the infrastructure for securitizations could stand separate from intermediate credit risk. That could also facilitate the disclosure standardization.
A level playing field also requires respecting the various channels for making and servicing mortgages. Both banks and nonbanks are quite cognizant of the expectations on them by regulators regarding their financial soundness and liquidity. HPC member lenders that are not commercial banks are aware of the discussion out there on nonbanks. They are quite determined to ensure their resiliency to withstand future storms. Many are former bankers and they know what the banks’ prudential framework looks like. Among our council, we don’t treat this as a bank/nonbank issue but a counterparty strength issue. The market deserves to have a sense of soundness. The largest entities have different charters, different benefits and requirements but the housing finance system needs them competing with each other, acting responsibly in the marketplace, and ensuring their financial soundness.
HW: What is the proper leverage ratio for the publicly traded Fannie and Freddie?
DeMarco: It’s more than what FHFA proposed in that initial proposal. The framework for having a granular capital charge based on the fundamental risk characteristic of mortgage is a perfectly appropriate standard to use. But what’s not appropriate is to have one set of rules for Fannie and Freddie and another for banks. There needs to be comparability in how we think about operational risk, systemic risk and counterparty risk. The FHFA proposal of 2018 was very pro cyclical and there needs to be a countercyclical element to it.
HW: Minority homeownership is still a challenge. What encourages you as you look at what’s being done to boost minority homeownership?
DeMarco: In the last year or so there seems to be a lot more attention being paid to housing supply issues. That’s where I would start any conversation about housing affordability — for rental housing and affordable single family housing.
Supply issues are about permitting, land use, zoning, and also about labor costs. There’s a lack of appreciation that many markets have a shortage of semi-skilled labor that’s important for construction.
On the financing side, this is where I see a tremendous opportunity for housing finance reform to actually try something different. I find it curious that on the one hand, people, including many members of Congress, decry access to credit and housing affordability issues and yet they want to maintain the approach that we take with the GSEs, that this be done with subsidization for Fannie and Freddie, based on the credit quality of the borrower.
For whatever merit that approach had in terms of what the barriers were to homeownership in the past, we should be looking at families today and asking what barriers they are facing now. I expect we will find things like saving for a down payment, and improving financial literacy to understand, not only just a mortgage, but the family balance sheet are meaningful hurdles. Financial literacy is a huge issue, but there’s an opportunity here, in encouraging homeownership, to also improve financial literacy.
Another big hurdle is that family income has gotten a lot more volatile than it was a generation or two generations ago yet financial reserves are very small for many families. People have multiple jobs or rely upon multiple earners to repay a mortgage. So, if we want to get people in mortgages and make it more sustainable, we need to be thinking harder about the shock absorbers families have access to when they hit that bump in the road, when their income gets disrupted for, say, six months.
The bigger picture should take into account those kinds of disruptions. When it comes to affordability, do I really think the barrier is 25 bps on interest? No. Instead, there should be a way to structure the mortgage and build into the process buffers that can help families weather the storm. It might be to put money in reserve, or set up a matching fund where the borrower has skin in the game, or a borrower reserve fund that taps equity in the house, or a structure that has a built-in buffer that can help families. We need more thinking like that in terms of affordable housing.
Potential homebuyers haven’t forgotten the lessons of 12 years ago. They have legitimate concerns about getting into the market.
I think that certainly the past discriminatory practices that were built into mortgage policy created racial wealth disparities that are still a barrier and a challenge. How do we identify the households or communities in need of support and try to deliver that support, as opposed to the system we’ve had? Versus, what do we charge this group of borrowers for the risk? Finally, our current system subsidizes taking on debt, when the goal is wealth building. If the goal is to help families build real wealth, then why are we allowing them to take on more leverage rather than focusing more on building and maintaining equity?
HW: Where will that kind of leadership come from?
DeMarco: I think it has to come from the private sector. One of the things I’m most excited about is the engagement the industry is having around this. The HPC is in the middle of this, but we’re not the only ones. In the last year you see industry advocates and housing advocates sitting at the table together having some really thoughtful discussions. Rather than looking to Congress, we can try to solve it for ourselves. We can work together and come up with ideas and solutions to present to congress. We’ve had some very productive discussions and sincere interest on all sides to come together and solve this.
HW: It’s interesting that you think this will be led by the private sector, given all your years in public service.
DeMarco: The curious thing about housing finance reform is that there is virtually universal agreement on the principles and components of reform. When it comes to major legislative reform proposals and the principles of reform, both sides have a ton in common about wanting to get taxpayers’ risk exposure way down, on bringing in private capital, for government guarantees on MBS, for the common securitization infrastructure.
But with the political environment we’re in now, it is so hard to get bipartisan support. It’s not impossible, you can certainly get bipartisan agreement on difficult, important issues like this, but when you can get industry and advocacy groups to come together, that helps a lot with the constraints that our lawmakers operate under.