Editor’s note: This piece was originally featured in the Oct/Nov magazine and has been updated to reflect the latest changes and announcements at the FHFA.
Nearly five years after the global financial crisis, lenders and the government-sponsored entities were still negotiating who would bear responsibility for defaulted loans.
The negotiations centered on the Federal Housing Finance Agency’s Representation and Warranty Framework, which gives lenders assurance, under certain conditions, that the GSEs would not make them buy back a loan. The Mortgage Bankers Association had already been in negotiations with the GSEs, but sources told HousingWire they had reached an impasse.
The stakes were high for the mortgage industry: The government-sponsored entities had just made lenders repurchase billions in such loans. In just the first quarter of 2012, Fannie Mae had $14.6 billion in outstanding repurchase requests. Many of the loans had deficiencies, such as lack of verification of income.
At the time, the industry argued that forcing too many loan repurchases would have a chilling effect on mortgage originations and severely damage the relationship between the GSEs and lenders. Sandra Thompson, then at the FHFA, engaged the MBA directly, brought them to the table with FHFA, and was instrumental in subsequent changes to the program. The program protects lenders from the threat of repurchase requests in the event of a default, after 36 months of borrower payments.
Thompson’s collaborative approach with industry stakeholders is a departure from her predecessor, Mark Calabria. Industry sources said that while Calabria was often eager to make public speeches, he cared little for insight from others because he was singularly focused on re-capitalizing the GSEs to free them from conservatorship.
In contrast, Thompson, now acting director of the agency that regulates the two quasi-federal entities which secure half of the nation’s $11 trillion mortgage market, kicked off her tenure with a listening tour.
She and her team have in recent weeks held Zoom meetings with numerous trade groups, including the MBA, the National Association of Realtors and mortgage lenders.
“She has been in touch with us, not to say, ‘What should I do?’ but, ‘How should I implement it?’” said Bob Broeksmit, president of the MBA. The relationships Thompson has cultivated with industry stakeholders play an important role in her regulatory vision for the agency.
In her first three months leading the agency she has set new affordability benchmarks to expand access to credit in underserved communities, made on-time rental payment history part of Fannie Mae’s underwriting process and signed a historic interagency fair lending agreement. But Thompson’s FHFA is just as focused — if not more so — on safety and soundness.
At an October virtual panel hosted by the National Housing Conference, Thompson said the way the GSEs “look at credit needs to change.”
But for those who fear she is perhaps too focused on the affordability portion of her mission, especially in her statements as acting director to date, Thompson offered a clear message.
“I don’t think the credit box is too small,” Thompson said. “I would say it’s not being utilized well.” She also defended the GSEs loan-level price adjustments.
For champions of expanding access to credit at all costs, her message was a wet blanket. But it was music to the ears of those who are equally concerned about not expanding access to credit too sharply.
Ed DeMarco, president of the Housing Policy Council, who was acting director of the FHFA from 2009 to 2014, said in an earlier interview with HousingWire that Thompson’s priorities are reflective of the “balance and the duality for the vision and what she sees as FHFA’s responsibility.”
“Safety and soundness and access to credit are not mutually exclusive, but reinforce each other,” DeMarco said of Thompson’s remarks. “You don’t come in and blow up underwriting standards in order to expand access to credit.”
What do you want? Information
Soon after meeting an economist at a conference nearly a decade ago, Thompson, then an FHFA official, picked his brain about the minutiae of a regional economics topic: short sales, the economist recalled. Keeping a close eye on happenings in the industry has been a recurring theme throughout Thompson’s tenure at FHFA.
Industry outreach is also a longstanding practice at the agency, according to Naa Awaa Tagoe, acting deputy director for the division of housing mission and goals, the division Thompson led before she ascended to acting director.
While the FHFA does not work directly with lenders, it “recognizes the importance of creating policy that is not unnecessarily disruptive to the market.”
In an interview with HousingWire, Tagoe said that FHFA tries to “stay close to the industry.” “We have outreach, we meet with lenders and servicers, we meet with mortgage insurers, and we get their feedback that way,” Tagoe said.
Over the years, Thompson has often been instrumental in that outreach, to both the industry and in coordinating with the GSEs.
In her previous role at FHFA, she worked very closely with Fannie Mae and Freddie Mac, according to Jeffrey Walker, who was Fannie Mae’s head of single-family until he left to found credit counseling startup CredEvolv.
“The last couple of years under [Calabria] were relatively frenetic, with such a fast pace of edicts and initiatives,” said Walker. “[Thompson] was always there to navigate the public policy changes.” Multiple people who have worked with Thompson, who requested anonymity either because they do business with the GSEs or work with the FHFA, described Thompson as an imminently qualified regulator whose understanding of capital markets is well-known.
She also has a reputation for keeping her cards close to the vest, multiple sources said. A former Fannie Mae official, who frequently worked with Thompson and her team, recounted that Thompson, early on at FHFA, questioned the GSEs’ purchase of any loans exceeding the 43% debt-to-income ratio.
Thompson was concerned about portfolio risk, the former Fannie official said. Multiple sources said Thompson does not like surprises — which was on display one year, when Freddie Mac went to market with a product without making Thompson’s team aware, a former GSE official said.
“People worry about regulators being captured by the agencies they regulate,” said one former GSE official. “That is not Sandra Thompson. She knows what her role is. She doesn’t put up with nonsense.”
Few people have the regulatory experience that Thompson has, and her actions, so far, have been in line with Biden’s agenda. Even so, his administration may have other designs on who should lead the agency. In September, sources said that Biden was expected to nominate Mike Calhoun, president of the Center for Responsible Lending.
Days went by as the industry awaited a formal announcement. Behind the scenes, Calhoun faced pushback from high-ranking members of the U.S. Senate. Other stakeholders took issue with Calhoun’s position that the GSEs should be regulated as public utilities. Dave Stevens, a former Obama administration official and prior president of the MBA, wrote an op-ed in support of Thompson.
“Let’s not create more potential disruption by bringing in an ideologue or someone with a different agenda when we have this proven leader in place,” Stevens wrote. California Democratic Congresswoman Maxine Waters, a key Biden ally, also wrote in support of Thompson.
Calhoun’s nomination did not materialize. Calhoun declined to comment through a spokesperson.
On the agenda
While the industry consensus, overwhelmingly, is that Thompson is exceptionally qualified to steer the FHFA, she has her work cut out for her. In recent years, both of the GSEs have experienced a brain drain.
Part of the reason so many people have departed, particularly at the executive level at Fannie Mae, is because of restrictive salary caps that have been in place under conservatorship. Fannie Mae employees make much more than their conservators do at FHFA, by several multiples — a tension that is not uncommon between regulators and the industries they oversee.
But compared to the private sector, it’s a pittance. The other, and perhaps equally important dynamic that has resulted in the talent exodus, is a stifling culture. In the past few years, the FHFA has discouraged innovation to carry out affordability goals. Much of that discouragement came directly from the top of FHFA, sources said.
It is too soon to tell if FHFA will be able to correct that trend. But innovations such as allowing on-time rental payments to figure into Fannie Mae’s underwriting process, and pushing the GSEs to submit equity plans by year-end, could help boost morale among public servants. The FHFA declined to comment on the brain drain.
The FHFA has ticked off another item on the industry’s agenda. In September, the U.S. Treasury and the FHFA agreed to suspend parts of its January preferred stock purchase agreement. The change eliminated GSE caps for loans with higher-risk characteristics, and loans on investor and second homes.
Those who pushed for the elimination of the caps pointed out that the higher-risk loan limits might make it harder for the GSEs to meet their new proposed affordability benchmarks. The GSEs often struggled to make the grade before Thompson raised the standards.
In the last 11 years, Fannie Mae has missed its low-income purchase goals three times and its very low income goals five times. Freddie Mac has missed its low and very low income goals five times each since 2010, per FHFA’s report on their performance.
“As the market evolves, [the GSEs] respond and they have a number of levers to ensure that they’re meeting their safety and soundness goals of building capital but meeting their mission activities, which includes housing goals,” said Tagoe. “They’ve done this year in, year out. Every now and then sometimes there’s a goal or two that they don’t make. But the management teams at both enterprises take that mission requirement really seriously.”
Tagoe said that as the agency takes actions to expand access to credit — such as with the on-time rental payments program — it is intensely focused on safety and soundness.
“When we’re thinking about expanding access to credit, it’s on the margin and it’s doing it in a really safe and sound way,” said Tagoe. “So this is not just sort of a broad opening of the credit box, this is really laser focused on the margin, and really carefully considering what I would say are additional factors or compensating factors.”
The industry will also be closely watching the outcome of a new memo of understanding between FHFA and the department of Housing and Urban Development to cooperate on fair lending examinations, share information and resources.
Some have suggested that the agreement signals that there will be heightened scrutiny surrounding the GSEs’ underwriting systems. A recent report by investigative data journalism outlet The Markup analyzed conventional loans and found that even when many factors were held constant, borrowers of color saw much higher rates of denial.
The mortgage industry has criticized the analysis, which did not look at Federal Housing Administration or Veterans’ Affairs loans. Those programs typically loan to low- and moderate-income borrowers. The report, which did not take into consideration credit scores in the analysis, criticized the GSEs for using an outdated credit score that does not include utility and rental payments.
An FHFA spokesperson said that Fannie Mae and Freddie Mac are in the process of evaluating new credit score models.
Tagoe said that the agreement between HUD and FHFA does not mean there will be more scrutiny of the GSEs’ underwriting algorithms, but rather will formalize sharing of resources, such as supervisory data on fair lending examinations of the GSEs that would not otherwise be available. HUD already analyzes changes to the underwriting process to ensure there is not disparate impact.
And, if disparate impact were identified in Fannie Mae and Freddie Mac’s underwriting, the FHFA would bear some responsibility. The GSEs craft their underwriting guidelines based on mandates from their conservator.
“A lot of the policy around risk-based pricing is informed at a 30,000 foot level by FHFA,” said Walker, now of CredEvolv. “There’s a thorough fair lending review within each GSE every time there’s an adjustment to the [Desktop Underwriter] or Loan Product Advisor. So it’s hard to say there hasn’t been some level of understanding.”
This story was originally featured in the October/November issue of HousingWire Magazine. To read the full issue, go here.
To view past issues of HousingWire Magazine, go here.