Remarks Adapted From Comments Delivered by Timothy J. Mayopoulos, President and Chief Executive Officer
MBA Annual Convention, Washington, DC
It’s great to be with you today to speak. I always appreciate the opportunity to speak with you, our lender customers. Our partnership is essential as we work together to support the economic recovery and build a better housing finance system.
Let me congratulate the MBA on its 100-year anniversary. Your theme for this meeting – 100 years strong – is fitting. As an industry, we have experienced significant challenges. I believe we are stronger and better as a result of the lessons we have learned in the past. At Fannie Mae, we also have a long history. We have been with the MBA for much of your journey. This year marks our 75th anniversary.
Fannie Mae History – 75 Years
To understand where Fannie Mae is today, it is important to recall why the company was founded in the first place.
During the Great Depression, our country recognized the need for a reliable, steady source of funding for housing. Prior to the creation of Fannie Mae and the Federal Housing Administration, families had no consistent access to affordable mortgage credit.
Through the 50s, 60s, and 70s, homeownership grew and contributed to the rise of the middle class in America.
In the 1980s, the global capital markets became important to the company’s business through the development of mortgage-backed securities. This allowed Fannie Mae to bring the world’s capital to America.
In the 2000s, Fannie Mae and Freddie Mac both struggled to respond adequately to a quickly and substantially changing market driven by declining credit standards.
As we all know, in 2008, the global financial crisis hit and the Federal government stepped in to support the U.S. housing finance system. For Fannie Mae and Freddie Mac, this meant federal conservatorship. This was a profound event – conservatorship marked the end of the old Fannie Mae. That company no longer exists and it is not coming back.
However, a “different” Fannie Mae has played an essential role in enabling policymakers to respond to the housing crisis and contribute to the economic recovery. Consistent with its long history, Fannie Mae in the crisis has been an important tool to support housing markets and sustain the housing finance system. We estimate that, in its 75 years, Fannie Mae has provided nearly $13 trillion in liquidity to its lender customers.
In the wake of the financial crisis, we have remained the leading source of liquidity for housing in the U.S. as we have returned Fannie Mae to profitability and paid taxpayers $105 billion through dividend payments to Treasury. We have posted additional facts and information about our progress that may be helpful to you on our website at fanniemae.com/progress.
Fannie Mae Today
Fannie Mae’s interests today are aligned with the taxpayers. We attract global capital to the United States to create large-scale access to affordable mortgage credit in all economic cycles. As a result, working with you, our lender partners, we enable families to buy, refinance, or rent a home, even in times of crisis. We have a clear set of priorities to fulfill that purpose:
- Supporting America’s housing recovery
- Paying taxpayers for their investment in our company
- And participating in reforms today that we believe will create a sustainable housing finance system for tomorrow
Building a Sustainable Housing Finance System
So, what might that sensible, sustainable system look like? First, it would reduce uncertainty and correct the obvious defects in the old system:
- If there is to be a government role in housing, that role should be explicit
- If there is going to be a taxpayer guarantee, the taxpayers should be fully compensated for that guarantee
- Private capital should stand in front of the government to withstand market downturns. The amount of this private capital needs to be substantially higher than the capital the GSEs historically held
- Any institution that can deliver a government guarantee needs to operate with the understanding that its risk profile is different and that there is a responsibility to set and enforce proper credit and underwriting standards
- And, strong regulation of the market and good governance are essential
Second, a sustainable system would consider an appropriate range of products with a focus on consumer protection – as we are seeing with the Qualified Mortgage rules. For example, do we as a country want to retain the 30-year fixed interest rate loan for some significant portion of the market? Approximately 74 percent of homeowners say they prefer the 30-year over other products. Long-term fixed-rate mortgages are generally considered beneficial because they protect families from sudden changes in housing cost. But long-term fixed-rate mortgages are not a naturally occurring phenomenon in financial markets. Only government involvement makes this work.
Third, a sustainable system would include much greater private capital participation than we have seen in recent years. This raises an important question of whether private capital is willing to take credit risk to participate in the market at sufficient scale, and if so, at what cost?
Five years after the financial crisis, we see limited evidence of private capital ready to share substantial amounts of mortgage credit risk. We are working to stimulate that participation, but the size of the U.S. mortgage market is such that we need a better strategy than hoping that private capital will fund this market.
Fourth, a sensible system would preserve the benefits of the old system. It would ensure reliable access to affordable credit in all markets at all times – something that most financial markets do not do at all times. And it would preserve the knowledge and capabilities of the people and institutions that have delivered this reliable stream of credit for more than seven decades.
Finally, while people are understandably focused on the end state of our future system, we need to be at least as thoughtful about the transition – how we get from here to there?
We need to preserve the people and capabilities of the critical institutions, including Fannie Mae and Freddie Mac, that make the current system work while we move toward a new system.
These are all critical considerations for lenders, investors – and especially policymakers – as they decide the future of housing in our country.
While Fannie Mae does not take a position on any legislation, we are fully aware of the defects of the old system, and we are working to correct them. Reform is already happening at the GSEs and in the industry.
We have substantially improved loan quality, advanced appropriate underwriting standards, increased pricing to better reflect risk, and enhanced how we collect and report data.
Our loan quality initiatives, such as the Uniform Mortgage Data Program and EarlyCheck, deliver better information earlier in the loan process, reducing the risk of repurchases at a later date.
In addition, we are exploring new ways to attract private capital and transfer credit risk through the Credit Risk Transfer initiative.
And, we are contributing to the development of the Common Securitization Platform being led by FHFA.
We also are reducing uncertainty through the new representation and warranty framework. The old rep-and-warrant model didn’t work well for originators or for Fannie Mae.
We committed to a new model with significant enhancements, and it will continue to evolve into a more nuanced and less binary series of enforcement mechanisms.
We have developed tools to better inspect the loans we buy. We will be freely sharing our insights about potential issues with originators. And, we will work with them to determine appropriate alternatives to repurchase where possible.
The good news is that the book of business we have acquired since 2009 is much better than from 2005 through 2008. As of June 30, 2013, less than one quarter of 1 percent of the loans in our new single-family book have been subject to a repurchase request versus more than 3 percent of the single-family loans we acquired between 2005 and 2008.
I recognize that repurchase resolutions on our legacy book are an important and timely topic, and I want to be clear on our intentions and actions.
I committed early this year to completing our reviews of legacy loans in 2013. We are on track to do that.
We want to resolve legacy loan repurchase issues to reduce uncertainty, strengthen the market, and ensure taxpayers are compensated fairly.
Resolving these issues and preserving solid business relationships with our lender partners is important to our support of the housing recovery.
In conclusion, this country is unique in its tradition of supporting housing – that’s one of the reasons we are here today celebrating 100 years of the MBA.
While we have experienced some very difficult problems in the past decade, the system overall has worked well for most of its long history. Our system has:
- Attracted global capital efficiently
- Provided deep liquidity to all markets at all times
- And lowered the cost to acquire credit
As we look to the future, let’s be certain that we understand what we are solving for: What are we seeking to accomplish by refashioning the system?
Returning to the old way – the old Fannie Mae – is not and should not be an option. We should, however, be just as cautious about the complexity, cost, and risk associated with new models.
Yes, we must fix the problems of the past. But not everything was broken, and trying to overhaul everything about our current system could result in negative long-term consequences for the housing market and the stability of the U.S. economy. We should all be concerned about the risk of unintended consequences. Housing is too important to our economy for us to get this wrong.
At Fannie Mae, our goal is a safer, more transparent, and sustainable housing finance system.
We want to work together with you to achieve it.