Ed Haldeman's Speech to the Detroit Economic Club on January 26, 2010
Prepared Remarks for Ed Haldeman
CEO, Freddie Mac
Detroit Economic Club
Detroit, Michigan
January 26, 2010
Thank you, Tom [Dekar]. And thank you all for coming today. I’m pleased to have the opportunity to speak with you at this distinguished forum.
I’m not from Detroit, but I feel like I have some things in common with you. I grew up in Philadelphia, helping run our family business, which delivers license plates to automobile dealers. So I’ve had some experience with the ups and downs of the automobile business. And when an automobile dealer closed up and went out of business, our family often suffered as well because of an unpaid bill that had to be written off.
Over the years, I remember watching the 76ers and the Pistons play some pretty terrific basketball games. Many of you watched the same games. So you can imagine what a special thrill it was for me to meet this morning with your new Mayor, Dave Bing.
I’ve been at Freddie Mac about six months now. I took the job because I wanted to lead and motivate our truly talented workforce. I wanted to help reshape and strengthen the company for a successful future. Most of all, I believe in the company’s public purpose of supporting housing in our nation.
Despite our being in conservatorship – and in some ways, because of it – Freddie Mac can play an extremely vital role in helping our nation recover from the economic and foreclosure crisis. There’s a great deal we are doing to help the country, the housing sector and America’s families. And I wanted to help the company contribute all that it can to this important mission.
Detroit is a fitting place to discuss the housing crisis and our nation’s responses to it. I can’t think of a major city that has been more hard-hit in this crisis … or one whose people are more resilient in the face of it.
I’d like to talk with you about three main things today.
First, our nation is working through the most severe housing correction since the Great Depression. I want to focus on the implications of the foreclosure crisis nationally and here in Michigan. And in looking at housing and the broader economy, I’ll consider both the challenges and opportunities for recovery.
Second, I’ll cover the top priorities our regulator has identified for Freddie Mac. Here I’ll discuss our efforts to make the President’s program, Making Home Affordable, successful. I’ll also survey some of the many other things we do to provide stability, liquidity and affordability to the housing finance system.
Finally, I’ll conclude with a few brief thoughts on the nature of our housing finance system and the kind of secondary mortgage market we need going forward.
The Crisis and Prospects for Recovery
I’ll start with Freddie Mac’s view of the foreclosure crisis and then speak to macroeconomic issues as well. For many years, with manufacturing in decline, subprime delinquency rates here in Michigan were among the highest in the nation. At the start of 2005, Michigan’s serious delinquency rate for subprime loans was 50 percent higher than the national average. And these rates rose rapidly, ending the 3rd quarter of 2009 at 28.9 percent.
But now you have plenty of company. Nationally, the subprime delinquency rate rose even faster, so it now stands at 28.7 percent, essentially the same as yours. Michigan’s serious delinquency rate among prime loans is now also very close to the national average, at 6.9 percent versus 6.3 percent for the nation.
These numbers are painful. That’s why the signs of improvement we’re seeing now are so encouraging.
Nationally, the macroeconomic data seem to indicate we’re in transition to a recovery. Our best estimate is that the rate of growth this year will be relatively modest following such a severe recession – say, 3 or 3.5 percent growth – but that, importantly, the recovery will be sustained over time.
Two main factors support this. First, the recovery is supported by last year’s fiscal stimulus, only half of which has been spent or obligated. Second, the Fed is keeping interest rates at record lows, which is also helping support the private sector.
In housing, we’re seeing signs of stabilization as well. The numbers will always bounce around some, but from home sales to house prices, it appears that nationally we may at last be approaching a bottom. The big downside risk to all this is a large wave of homes now in foreclosure potentially hitting the market at prices that are destructive. Upside factors include the tax credit for home purchases that was extended through April 30th. And of course it helps that mortgage rates are low. We expect the 30-year fixed rate to remain between about 5 and 6 percent throughout 2010. Even the high end of that range is historically a low rate.
You’re probably asking yourself two questions: What about employment? And what about Detroit?
Employment is typically a lagging indicator in a recovery, and we don’t expect the national unemployment rate to decline until the second quarter of this year. As for Detroit, the unemployment rate of 15.8 percent is more than 5 percentage points above the national average.
I would point out, however, that other great cities have faced similar challenges successfully. Pittsburgh went from being world leader in steel production to economic wasteland when that manufacturing industry collapsed. Pittsburgh’s rebirth has been based on diversified employment in such fields as education and health care. In fact, Pittsburgh’s largest manufacturing firm, U.S. Steel, is no longer even one of the city’s top ten employers. And the city’s unemployment rate is well below the national average.
In Pittsburgh, Carnegie-Mellon and the University of Pittsburgh helped spur innovation and economic growth. Here, the University of Michigan and Wayne State University can play similar roles. Likewise, the large public investments you’ve made in “green jobs” draw on the Detroit area’s exceptional infrastructure of skilled engineering, R&D and manufacturing.
A recent poll of Detroit area residents showed that, despite their acute awareness of the region’s problems, 63 percent of respondents are optimistic about the future of the Detroit area. That doesn’t strike me as crazy, cockeyed optimism. Rather, I think the people of Greater Detroit know that with smarts, hard work and patience, this can be a vibrant economic center again, with a transformed and diversified employment base.
It will take years, no doubt. But it’s been done before and it can be done again. As in Pittsburgh, the low cost of housing here can become a plus to attract employers. And I for one would bet on the people of Detroit.
Regulatory Priorities for the GSEs
In focusing on the role of Freddie Mac, let me turn to our broad priorities as identified by our regulator and conservator. The Federal Housing Finance Agency has described the three main duties of the government-sponsored entities, or GSEs, as follows. We are to:
- Provide ongoing support to the housing market.
- Remediate identified weaknesses in our company. This is something we take very seriously and I’ve told our employees we can’t succeed without it.
- Prevent avoidable foreclosures.
These are useful categories of our duties and I’ll focus on the first and third.
Our Ongoing Support to the Housing Market
First, I’ll describe our stable, ongoing support to the housing market, which includes a large part of our everyday mission. With the markets still seized up, we have continued to provide an ongoing stream of funding for mortgages, every day, in all geographic markets. In fact, the GSEs funded almost three quarters – 72 percent – of all mortgage loans originated last year.
And we have done this at a time when most other sources of liquidity have dried up. Even when private label investors abandoned the market, Freddie Mac continued to serve our mission on behalf of homeowners and renters across the nation.
In this kind of environment, our constancy and stability is especially valuable. As HUD Secretary Shaun Donovan testified before Congress in October, “We cannot lose sight of the important role that the GSEs are playing today in the recovery of the market. Without [them]… there would not be mortgage capital available broadly, and it would certainly not be available at the rates that have been available.”
Last year, Freddie Mac provided liquidity for nearly $550 billion in home loans. By purchasing or guaranteeing well over half a trillion dollars in mortgages and mortgage securities, we helped some 2.2 million borrowers and another 350,000 renters.
Compare all this to 2006, at the height of the boom, when private institutions provided over 60 percent of liquidity. It may not seem important who provides liquidity to the markets, but it is. Freddie Mac’s charter is to be in housing and only housing. We stay in this market in good times and bad. Unfortunately, the history shows that private lenders abandon housing when the going gets tough.
We also have an incentive to underwrite mortgages in a manner that is safe and affordable. Freddie Mac owns almost a quarter of the mortgages in the United States – yet we account for less than 10 percent of the seriously delinquent mortgages. By contrast, private label securities represent only 12 percent of first mortgages outstanding, but they account for one third of all seriously delinquent loans.
When you ask people what fraction of Freddie Mac’s loans they think are seriously delinquent, the estimates usually start at 1 in 5 and go up from there. The truth is, less than 1 in 25 of our loans are seriously delinquent. This record puts us among the very best in the industry.
Our Efforts to Avoid Foreclosures
Now let me move to the other major duty of the GSEs as outlined by our regulator. Freddie Mac is devoting tremendous energy and resources to the task of preventing avoidable foreclosures. But this isn’t a new focus for us. We’re a long-time leader and innovator in helping families hold on to their homes. In fact, over the past five years, we’ve worked through our servicers to help almost half a million seriously delinquent borrowers avoid foreclosure.
For some homeowners, we may modify the original terms of their loan to make it more affordable. To others we offer forbearance – an agreement that temporarily suspends or lowers payments after a job loss, health issue or other event. Our foreclosure alternatives also include repayment plans that add past due amounts to monthly payments to bring homeowners current over time.
In the first three quarters of 2009 alone, using methods like these that Freddie Mac helped pioneer, we helped nearly 100,000 struggling borrowers avoid foreclosure. Nonetheless, with over 4-1/2 million families on the brink of losing their homes, there’s a historic need for a national effort to address these pressing issues. And we are striving to do our part in that effort.
I want to talk about foreclosure prevention mainly – but not exclusively – as it relates to the Making Home Affordable Program, or MHA. MHA is the Obama Administration’s anti-foreclosure and refinance program. And it’s where our company is presently focusing most of our homeownership preservation work.
The MHA Refinance Program
MHA consists of two main parts: a refinance program and a loan modification program. I’ll discuss both.
Over the past year, borrowers have flocked to take advantage of historically low interest rates and refinance their home loans. But before MHA, it was difficult for borrowers to qualify for refinancing if they owed more than 80 percent of their home’s value … which of course has happened more and more due to house price declines.
Our MHA refinance program is aimed at helping borrowers with Freddie Mac-owned or guaranteed mortgages – who are up to date on their payments, but ineligible for a traditional refinance – to take advantage of the low interest rates available today. Their loan-to-value ratios can be as high as 125 percent.
The program has made a real difference. Through the end of last year, we had refinanced loans for almost 170,000 families through MHA. Families often see their interest payments drop by thousands of dollars per year.
Together with Freddie Mac’s longstanding programs, we refinanced approximately $379 billion in home loans in 2009. This created an estimated $4.5 billion in aggregate annual interest rate savings for more than 1.7 million families.
The MHA Modification Program
The second piece of the MHA program is called HAMP or Home Affordable Modification Program. This part of the MHA program is designed to modify existing mortgages so they’re more sustainable for the long term. Through the first 11 months of last year, we had initiated nearly 123,000 MHA trial modifications. Borrowers are saving an average of over $550 per month.
Now, it may sound as if initiating nearly 123,000 HAMP modifications is small when compared to the nation’s immense needs. But please remember that the universe of at-risk borrowers we can help is less than a tenth of the total – which again is the fraction of seriously delinquent loans held by Freddie Mac.
Moreover, fully a third of the homes on which Freddie Mac would like to arrange a modification are empty. Obviously, it’s hard to work out a loan modification when nobody’s home.
If modifying these loans were easy, MHA wouldn’t be needed. But because these modifications are challenging – and we’re committed to supporting the President’s program – we redoubled our efforts under the program last fall.
To be even more proactive, we’ve rolled out additional initiatives and begun to invest $25 million in new strategies and projects. This initial investment will allow us to test approaches and see what works best, at the same time we’re helping tens of thousands of families.
For those of us working to help families save their homes, there’s nothing more frustrating than an avoidable foreclosure. Particularly when there are so many options available to homeowners, but they often don’t know what to do or who to believe. We know from research and our own experience, however, that when borrowers actually work one-on-one with a trusted housing counselor, they are far more likely to save their homes.
So our anti-foreclosure team has been reaching out in unprecedented ways to at-risk borrowers. For example, we’ve hired Titanium Solutions – a national expert in contacting and counseling homeowners – to go to borrowers’ homes, knock on their doors and explain calmly what could happen if they don’t take action. When needed, they return to help homeowners fill out the required documents.
To reach even more delinquent borrowers, our foreclosure prevention experts have teamed up with our housing outreach team to pilot some very creative efforts. Let me tell you about one we’re announcing this week.
It’s a Borrower Help Network that will reach out to thousands of borrowers across the nation – including Detroit – who have been confused or demoralized by the mortgage modification process.
The Freddie Mac Borrower Help Network uses several of the nation’s most trusted non-profit organizations to give these borrowers confidential, personalized, “holistic” financial counseling over the phone and help them work through the different options for avoiding foreclosure. Holistic counseling addresses credit card and other debts, not just mortgage debt in isolation. Research shows that this kind of counseling from trusted non-profits can substantially improve a borrower’s odds of avoiding foreclosure.
Here in Detroit, Freddie Mac’s Borrower Help Network includes Southwest Housing Solutions. Southwest is an outstanding organization that is already working with over 2,400 distressed Detroit borrowers and has successfully helped nearly 1,400 of them.
But the Borrower Help Network is national in scope. By working with the National Urban League, the National Council of La Raza and other established non-profit organizations, our goal is to make this same counseling available to thousands of Freddie Mac borrowers across the country.
In addition, we will be delivering these same kinds of counseling services through regional Borrower Help Centers. We are announcing our first pilot centers this week in Chicago; Washington, DC; Phoenix; and California’s Inland Empire.
The scale and scope of this pilot initiative is unprecedented for Freddie Mac. If it’s successful, we hope to replicate it in other cities.
All these ambitious, aggressive efforts are directed at the difficult task of helping more borrowers modify their loans and save their homes. And all are premised on the view that we should give these borrowers the same type of personalized, “sitting around the kitchen table” guidance that borrowers ideally get when they first buy a home or apply for a mortgage … and which helps start them on the road to successful and sustainable homeownership.
All told, we estimate that Freddie Mac helped more than 250,000 borrowers avoid foreclosure in 2009, both through our traditional methods and the MHA Program. That compares to 88,000 for all of 2008. Clearly that’s a good, accelerating trend line. And we’re working hard to build on it.
Principles of a Successful Secondary Market
I’ll conclude with a few brief thoughts on the nature of our housing finance system and the kind of secondary mortgage market we need going forward.
Obviously we want to make sure that Freddie Mac has a voice in the debate about the GSEs’ future. But let me be clear. Our role is to answer questions, provide information and be responsive. Others will decide. Others are the decisionmakers.
Still, given the opportunity, what kinds of facts will we bring to the attention of decisionmakers? Broadly speaking, what are some of the key traits we believe the U.S. secondary mortgage market ought to include? And do the GSEs help the housing finance market achieve these desirable traits?
When asked, we’ll remind decisionmakers that Freddie Mac has a constructive, vital role in the markets – and that we help enable the housing finance system to do a number of very important things:
- The GSEs help make possible the 30-year fixed rate mortgage – of a kind and on a scale unique to this country. By giving families stability and certainty, this is a real economic asset for our nation.
- We are the constant liquidity provider – the source of almost three quarters of the liquidity to the mortgage market last year.
- We are the “backstop bid.” That means our customers know there will always be a buyer for their loans – which gives them the confidence they need to keep lending in any environment and keeps prices more stable.
- We deal with innovation in the mortgage market better than a purely government entity.
- And we are an important counter-cyclical influence that stays in the housing finance market even when purely private capital has pulled out. This has been proven by the events of the last two years.
We don’t claim to be perfect. I’m glad our regulator was strengthened, and that further reform and regulation is virtually certain.
But we perform a vital mission for the nation, and the MHA program is just one example. And the fact is, because of Freddie Mac’s public purpose, we’re making decisions on MHA and other issues – without being guided solely by profitability – that no purely private bank ever could.
So I think there’s much positive to be said about the GSEs, and I hope our value will be recognized. But meanwhile, our intense focus is on helping the housing sector and the broader economy recover.
That’s what our employees care about and it’s deeply motivating. Because it means we’re needed, we have a unique and vital role, and we are making a difference. And there’s nothing better than having a purpose which is meaningful and important.
It’s why Freddie Mac’s employees are the most committed I’ve ever had the privilege to lead.
And it’s why their special skills are so vital to the nation.
With that, I want to thank you very much for your attention.
And now I’d be happy to answer your questions.