October 21, 2015

Freddie Mac's Plans for the Future

Donald H. Layton
Donald H. Layton, CEO*

Over the last few years, we have moved on from the early-years conservatorship mindset, which was characterized by us being hesitant to make decisions, by waiting for the government to tell us what to do, or waiting for "imminent" legislation. Now we are a more aggressive company, customer-focused and better at execution than ever before.

We're firmly facing the future, not the past. And we're very much working not only to have a better company but also a better housing finance system for all.

First, take our mission from our Charter to help families by being a great secondary market participant in the U.S. mortgage markets dedicated to the "liquidity, stability and affordability" of those markets. And being innovative in doing it – to benefit those families, whether homeowners or renters.

Let me focus on the "affordability" clause to show you how we're a better company today. In the past, our "affordability" mission was focused mainly on meeting the narrowly-defined affordable goals set by the government. Now, we view the "affordability" clause in our Charter very broadly, in fact as a "community mission". This covers classic affordability as well as other things like broad access to credit, foreclosure alternatives (which hardly existed pre-2008), and other community-focused priorities.

For example, Freddie historically was very conservative as a general matter in its operations, and had no over-95 percent LTV product since 2011. Now we have a 97 percent LTV product, for example, but it has been done right – i.e., responsibly and with acceptable credit quality. Although we're playing catch-up in a field we did not prioritize previously, we've done thousands of these loans, more than we expected.

Another example of our commitment to this Community Mission is a brand-new partnership with Quicken Loans, announced this week, to jointly develop products specifically aimed at the housing needs of low- to moderate-income borrowers, first-time homebuyers, and millennials.

In Multifamily, where our focus is on "workforce" housing, we have more than doubled our loans on projects in markets FHFA defines as "underserved" – going from $3 billion last year to an estimated $7 billion this year. That's big dollars and big momentum.

Expect to see more innovation from us across the entire spectrum of community mission activities.

Now let me focus on our customers. As an outside hire to Freddie Mac as CEO, I come with decades of experience in knock-down, drag-out competition in the banking world. It was very far removed from the genteel competition I found in the GSE duopoly.

Today, head of Single-Family Business Dave Lowman and his team have dramatically increased our competitiveness. For example, we have an annual customer satisfaction survey that primarily measures service quality. In 2013, the overall score put on our competitiveness by our outside survey vendor was 43 using their index – way, way under what the best companies deliver. But after all of the changes we've made – big and small – our latest survey shows us at a 78 score, which is getting us just into the range of the best-run financial institutions. Our target is to get the top of the range of best financial institutions.

Here's a different example of our increasing focus on customers. Before 2008, Freddie had an unduly strong focus on a small number of large lenders. Only about 16 percent of our single-family volume came from the lenders outside the top 10.

We rolled up our sleeves and began to focus on middle-sized and smaller customers. We added salespeople and newer service models because one size does not fit all. Today, aided of course by market trends favoring smaller lenders, we've tripled that 16 percent to about 50 percent! That's a big move.

We're also well on our way to delivering a string of enhanced technology capabilities over the next few years. The whole thrust of our "Loan Advisor Suite" of tools, just announced this week, is to give customers greater certainty and confidence that the loans they make are eligible for sale to us, and hopefully a way to lower costs and encourage fuller usage of our credit box. We are developing these technologies with key customers that are working with us to ensure they are really, truly user focused and friendly!

Our third major focus as a company is on making the system better for the U.S. taxpayer. We treat the taxpayer exposure to us with great respect. The direction from the government is very clear – reduce the taxpayer's exposure to mortgage risk. We took that direction to heart and are aggressively leading the field in credit risk transfer.

For Freddie Mac, credit risk transfer is not a "pilot' anymore. It is integrated into our entire business model. In Multifamily, over 90 percent of our dollar volume has all but catastrophic risk sold off to investors. Depending upon how you measure it, in Single-Family, we are selling off in the range of 2/3 or 3/4 of the non-catastrophic risk. Single-family risk transfer was zero a few years ago by comparison. Now it's a fast-moving field. The instruments we use are growing and evolving. We're also doing this with sound economics. It's very exciting.

All in all, I think we've accomplished more positive change and development in the last few years than in perhaps the last decade or more at Freddie Mac. But we're not resting on our laurels. We're laser-focused on getting better as a company and aggressively improving ourselves. And, with FHFA taking the lead, on making the entire housing finance system better.

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