Remarks Prepared for Delivery By Michael J. Williams
Drexel University LeBow College of Business, Philadelphia, PA
Thank you, Dean Tsetsekos, for that introduction and for the invitation to be here and return to my alma mater. Tonight, I’d like to share a little of what I’ve learned since my days at Drexel – and what I’m learning today – by briefly discussing three areas:
- First, some things to know about Fannie Mae, including our role in today’s market;
- Second, some perspective on the housing crisis and the outlook for housing going forward; and
- Third, some lessons we can apply, in my view, to strengthen the mortgage and housing markets.
A little about Fannie Mae
To give you some context, let me tell you a little about Fannie Mae and what we do.
First, our history: We began as a government agency in 1938 to help the housing market recover from the Great Depression. Back then, banks failed and stopped lending, causing millions of people to lose their homes when they couldn’t roll over their loans. We were created to get money flowing through the mortgage market again. We did that by selling bonds and using the money to buy mortgages from lenders. This replenished their cash so they could make more loans.
We were also created to make a market for long-term, fixed-rate loans. These loans were a novelty in the ‘30s and banks generally didn’t want to carry them on their books. Today, with our help, they are the standard mortgages throughout America, and they are our bread and butter. Dependable fixed-rate loans have become the bedrock of lending, giving many families the ability to own a home with the safety of predictable payments under all market conditions.
In 1968, Congress chartered Fannie Mae to do the same job as a private company – to keep money flowing through the mortgage system.
In the fall of 2008, when the mortgage market nearly collapsed, the government put us into conservatorship, which is a legal status that protects the company’s assets. Essentially the government has provided us with financial support so we can support – and help stabilize – the mortgage market.
The second thing to know about Fannie Mae is how our business works.
Chances are that today, about one out of every four of you live in a home that is financed with the help of Fannie Mae. We do this through two lines of business. We purchase mortgages from lenders and hold them in our investment portfolio. We also work with lenders to package their loans into securities and guarantee them. We do this for single-family homes as well as multifamily rental housing. Our charter also requires us to support affordable lending, and overall, about half of the homes we fund are for low- to moderate-income families and underserved communities.
The third thing to know about Fannie Mae is our role today.
I mentioned earlier that when the market began to collapse, the government committed financial support so we could continue to support the market.
To date, the U.S. Treasury has invested $75 billion in Fannie Mae. With that support, we provided over $800 billion in funds to the market last year alone, the third-most in our history. We were responsible for more than 40 percent of the mortgage-related securities issued to fund home purchases and refinancing. We also provided over 40 percent of the financing for rental housing. Through all of this funding, we helped more than 3 million families to buy, refinance or rent homes. In addition, our Capital Markets group helped smaller lenders bolster their cash flow so they can make more loans, buying $83 billion in loans to package into securities for sale, and providing early funding of $103 billion.
We were also appointed by the U.S. Treasury Department to administer the “Making Home Affordable” program. It helps struggling borrowers modify their loans and avoid foreclosure. It also helps borrowers who have lost equity in their homes to refinance into a better loan. Altogether, we have helped more than a million borrowers get into temporary or permanent loan modifications and avoid losing their homes.
In short, we’ve been tasked with playing a major role in stabilizing the mortgage market and putting housing back on track. We appreciate the government’s support for our company, and the critical role and responsibility we’ve been given. And we are doing everything possible to speed the recovery.
Causes of the housing crisis
Now let me focus on how we got to this point in the housing market.
Many observers say the housing bubble that reached its peak in 2005 and 2006 was caused by the confluence of several trends: low mortgage rates, easy mortgage credit, and strong investor demand for mortgage-related financial products. Several public policies – such as tax breaks, low interest rates and higher affordable housing goals – also made homeownership more affordable and accessible. Viewed separately, many of these trends had positive effects on the economy. Combined, they caused consumer demand for mortgage loans and investor demand for mortgage-related investment products to surge.
In order to continue meeting this demand, the mortgage industry responded with forms of lending that were unlike the 30-year fixed-rate mortgages of the past. These new products included subprime loans, Alt-A loans that required less documentation, adjustable-rate mortgages with low teaser rates, and negative amortization loans with reduced interest payments.
These loans often required very low down payments and offered low monthly payments in the short term, with interest rates that reset and became higher over time. Borrowers also had unprecedented access to home equity loans, allowing them to draw cash from their homes. The thinking was that housing prices would continue to rise steadily as they had for the past half century, allowing homeowners to sell at higher prices later. However, these complex financial products created gaps in experience, information and general understanding for borrowers, investors, institutions and regulators.
Debt loads grew – consumers carrying large mortgages had extraordinarily low financial reserves at a time when the economy was weakening, and unemployment was approaching some of the highest levels since WWII. When adjustable-rate loans began to reset, borrowers could no longer afford their payments and began to default, creating turbulence in the markets.
The dramatic downturn in housing had a ripple effect across the industry that soon spread throughout the U.S. economy and the global economy. All the leading economic indicators were falling, with no bottom in sight. Home prices, home sales and home construction were all collapsing quickly. Tens of thousands of borrowers were missing payments and heading into default. From the peak of the housing boom in 2006 through the end of 2009, homeowners saw an average home price decline of over $50,000, wiping out all the gain over the previous three years. Overall, homeowners lost more than $8 trillion in home equity during that time. Many loans went “underwater,” meaning the value of the homes fell below the mortgage principal.
As the housing downturn deepened, the flow of capital into the mortgage market nearly ceased as companies and investors that traditionally supply this money pulled back or went under. And since the housing market makes up a fifth of the overall Gross Domestic Product and is a pillar of the financial system, the housing crisis triggered a serious economic crisis.
Many people are wondering when the housing market will get back to normal. The economics team at Fannie Mae is working on this question every day. Let me share what we see ahead.
Bottom line, we believe things are indeed getting better. Over the past few months we’ve been seeing glimmers of recovery. The free fall in the market appears to have subsided. In particular, by the end of the year, if the labor market improves as expected, home sales should start to trend upward. We project a nine percent increase in total home sales for the year. And home price declines moderated in 2009 and we expect the trend to continue this year.
But we are far from out of the woods. Millions of homeowners are seriously behind on their mortgages and many may lose their homes to foreclosure this year, mostly because of unemployment. And the inventory of unsold homes is still at record highs, which makes it hard for home prices to stabilize.
All of this means we’re in for many more months of instability and volatility in the housing market. It also means Fannie Mae has a lot more work to do. Our priorities this year begin with keeping money flowing through the housing market, and reducing foreclosures that don’t need to happen.
Consumer attitudes about housing today
Whenever you go through this type of dislocation – which we hope will never happen again – you want to gauge the effect on consumer behavior. So we recently undertook a national survey to see how people feel about housing today. While Fannie Mae does not lend to consumers directly, we wanted to find out what impact the housing crisis has had on people’s attitudes about housing. With that information, we can adjust how we support lenders and the market.
What our survey found was interesting and sometimes surprising.
- First, in spite of the housing crisis, nearly two-thirds of Americans still prefer owning a home instead of renting.
- And 70 percent said they believe buying a home continues to be one of the safest investments available.
- In contrast, only 17 percent believe buying stocks is a safe investment.
- On a related note, nearly 90 percent do not believe it is acceptable for people to stop making payments on a mortgage that’s underwater – where the borrower owes more than the home is worth. That’s how much people respect homeownership contracts.
At the same time, people are more cautious about homeownership.
- About 60 percent believe it will be harder to get a mortgage than it was for their parents.
- More than 90 percent of borrowers who have 30-year fixed-rate mortgages say they’re satisfied with their mortgages compared with 76 percent who have hybrid adjustable-rate mortgages and 68 percent who have regular adjustable-rate loans.
- And nearly one-quarter of renters say they will wait longer than they had planned to buy a home.
- In fact, nearly 80 percent of renters surveyed believe that renting has been positive for them and their families.
What these and other survey results tell us is that in spite of the worst housing crisis since the Great Depression, owning a home is still held in very high regard. And financial institutions like Fannie Mae that fund homeownership and rental housing have a lot of work to do going forward. At bottom, the survey tells us that homeowners have made a shift to a “new reality” – one that is more cautious and more focused on the long-term.
Lessons learned from the housing crisis
Like these consumers, the housing industry is also applying lessons learned from the housing crisis, and making a similar mindset shift. There are four key lessons that I take away from the crisis: We need to increase sustainability, affordability, stability and transparency. Let me touch on these.
By sustainability, I mean that it’s not enough to put borrowers into homes – we have to make sure they can keep their homes. During the housing boom, too many borrowers took on subprime and exotic loans that artificially lowered their initial payments so they could afford to get into a home as prices continued to rise. But when their payments went up, and home prices collapsed, many borrowers were stuck with payments they could not make long-term, and homes they could not sell. The lesson learned here is that if too many borrowers are in the wrong loans, it doesn’t just endanger them – it endangers the entire housing and mortgage market and the economy. Since the collapse, the industry – including Fannie Mae – has strengthened lending standards to ensure borrowers can make their payments long term. That may mean some prospective homebuyers have to take steps to build up their eligibility for a loan, and wait until they can qualify for a sustainable loan.
The next lesson I take away is affordability. The mortgage industry has made great strides in expanding homeownership to working families and underserved segments of the population. But many of these newer homeowners are also the most vulnerable to losing their homes because they took on unsustainable loans. The lesson here, I believe, is for those who can’t afford a sustainable loan right away, we should prepare people for homeownership and ensure that there is a constant supply of decent, affordable rental housing. And for those hardest hit by the housing crisis, we need to help them stay in their homes or exit with the least possible impact on their lives.
Another lesson is the importance of stability. During the housing boom, Wall Street firms, hedge funds and other “private” financial institutions came to dominate the funding of mortgages. But when the housing market turned, most private sources of funds pulled out of mortgages, which threatened a complete collapse of the housing market. That’s when the government stepped in to support Fannie Mae and Freddie Mac. The government action ensured that funds would continue to flow to support the mortgage market, and keep mortgage rates low. The lesson learned here is that some government involvement in the mortgage market can serve as a stabilizing force for housing, especially in times of stress, helping to protect homeowners, renters and communities from financial and economic turmoil.
Finally, the housing crisis reinforced the lesson of transparency. During the boom, many borrowers took on the exotic new loan products to get into homes without completely understanding the risks. Many investors that purchased financial instruments backed by these exotic loans also did not completely understand the risks. Going forward, it is clear that everyone involved in the mortgage value chain – the borrower, the lender and the investor – is safer if we all know exactly what the risks are.
Let me give you an example of how Fannie Mae is making changes to improve transparency in the loan funding and guaranty process. Historically, when a lender wants Fannie Mae to purchase or guarantee a mortgage, we rely on the lender to confirm that the loan meets our standards, and if it doesn’t, the lender will take it back. This process helps us purchase millions of loans without having to check every one. However, we’re finding that many loans that are now failing had inaccurate information. We’re requiring lenders to buy back these loans, which is tough on them right now.
To address this issue in the future, Fannie Mae is undertaking what we call a “loan quality initiative.” Essentially we’re going to use technology to collect and process data about the loans up front so we know more about them. We’re also providing lenders with tools and resources to verify their loan data before the loans come to us. This new process will benefit both the lender and Fannie Mae. It also could reshape the model of how lenders in the primary market work with institutions like ours in the secondary market, for the benefit of all of us and the borrower.
The lessons I have just described are not new. Sustainability, affordability, stability and transparency have been pillars of our housing finance system for some time. But sometimes it takes a crisis to re-focus on the fundamentals. Given our central role in the market, Fannie Mae is pursuing opportunities to improve the system by applying these lessons and making changes in our business practices. This investment in the future is a top priority for our company going forward.
Leadership in turbulent times
There’s also a fifth lesson that I want to close on. It has to do with leadership.
About a year ago, we surveyed our 6,000 employees at Fannie Mae, asking them what would make working at the company better for them. Like most financial companies, we were hit hard by the housing crisis, and we were going through a lot of changes and challenges. On top of that, Fannie Mae was given a mandate to help stabilize the market. And policymakers were beginning to talk about restructuring the company.
With all of these forces, the challenge was to keep our workforce focused and motivated. We also needed to be able to retain – and also attract – the best talent in the market, because the demands on the company are extremely high. So we wanted to hear first-hand from employees what would help them keep performing at their best.
One of the results that leapt off the page of our survey was that our people expected more out of our leaders. Employees want to know where we’re going, how to get there, and how they can help.
To help with that, we created a series of six leadership criteria for our leadership corps, basically our officers and directors. Our criteria are homegrown, so to speak, developed through collaboration up, down and across the company. And they address the issues we face every day.
- First, leaders lead through change – they enable their teams to move into uncharted territory.
- Second, leaders collaborate and work across boundaries – they build relationships and work effectively beyond their own teams.
- Third, leaders deliver results – and drive for exceptional results.
- Fourth, leaders build and apply our talent – they empower and support people to work to their potential.
- Fifth, leaders balance competing priorities – they make effective trade-offs for the company.
- And finally, leaders act with courage and integrity – they do the right thing for the company.
We plan to build these leadership criteria into all of our human resources programs, from recruiting, to new employee orientation, to coaching and development, to performance evaluations and compensation. We believe they will help us continually improve our performance in serving the market, as well as help us attract, keep and grow the talent we need to do the work we’ve been given to do.
In closing, I hope you know a little more about Fannie Mae and the challenges and opportunities we’re facing, and a little more about this historic period for the housing market. And if there is anything about my experiences since Drexel that is helpful to our students here tonight, then I am even happier that I came home again. Thank you.