Ed Haldeman's Leadership Lecture at the Wharton Business School
Prepared Remarks for Ed Haldeman
CEO, Freddie Mac
Wharton Business School – Wharton Leadership Lecture
March 25, 2010
Thank you, Professor [Scott] Richard, and thanks to all of you for coming. It's great to be at Wharton and back in my hometown of Philadelphia.
I want to talk with you about four things this afternoon.
First, I'll discuss some of the key leadership principles I've learned during my career that I'm applying today at Freddie Mac to help reenergize this essential company.
Second, I'll turn to how we're focusing this energy toward Freddie Mac's vital role in helping our nation recover from the economic and foreclosure crisis. To understand the crisis better, I'll survey today's housing and economic outlook.
Third, given that outlook, what is Freddie Mac doing to advance our housing mission as articulated by our regulator?
Finally, I'll close with some thoughts about the needs and nature of the secondary mortgage market going forward.
Some Needed Background
At the outset, let me provide some needed background. The "GSEs" is an acronym for the housing government-sponsored enterprises, Freddie Mac and Fannie Mae. Since September 2008 we have been in conservatorship, a special legal status that enables us to continue supporting the housing recovery. Our conservator is also our regulator, the Federal Housing Finance Agency, or FHFA, which rightly keeps a very close eye on our operations.
Beyond that, when I arrived last August, I found a company still reeling from several other painful body blows. So when I came to Freddie Mac, employee morale was low; I was the sixth CEO in six years; and my friends were asking, "Why would you want to go there?"
Some Key Leadership Principles I Am Applying Today
With that background, let's move to our primary topic.
The first leadership principle I want to share with you is that integrity and ethical behavior are essential for business success.
Some say that ethics and profits are in tension with one another. I say that ethics are an essential precondition for business success.
As a GSE, in conservatorship, Freddie Mac undergoes special scrutiny every day. But any company, in any field, must understand that while an outstanding reputation takes years to build, it can be destroyed in a day.
Well before coming to Freddie Mac, I learned that ethics is the atomic bomb. It can blow up your business. And if you find wrongdoing, you have to cut it out, all of it, even if that's painful surgery in the short run. Because there may not be a long run – for your company – if you don't.
Principle two is, create an open, transparent and direct culture.
Here's another case where the right thing is also the smart thing.
Winning the trust of your employees is absolutely essential – especially if they've been hard-hit by adversity. You also need to make a real connection with them, individually if possible. That's why I have devoted so much attention at Freddie Mac to having small-group coffees and lunches with employees – holding roughly 50 such events since August. And that's in addition to regular e-mails, voicemails, quarterly town halls, frequent divisional drop-by events, and a host of other ways we reach out to our employees on a regular basis.
All this represents a significant commitment of CEO attention. The question is, Are the results worth it? I would never want to claim our work is done – or over-interpret the data – but in recent internal surveys, employee sentiment was way up in nearly every important category that we measure.
Employee Sentiment: Gains in Understanding of Corporate Strategy
And Confidence in Senior Management
A corollary of principle two is that transparency is not only essential with your employees. It's also vital to your relationships with other important constituencies, including regulators and governing authorities.
At Freddie Mac, we keep our regulator informed about hundreds if not thousands of matters every month. And we've been straight and transparent with the FHFA since the beginning. Here's an example of why that's so important. Recently, by mistake, we took a meaningful step a bit earlier than our regulator expected us to. The FHFA let us know it wasn't pleased, but because we've been so open with them throughout conservatorship, they understood that the foul-up I'm describing was strictly unintentional. And they treated it accordingly.
We don't plan on testing the limits of this principle again. But it stands to reason that an intelligent regulator will view an innocent mistake in a different light, based on how much transparency and cooperation they've seen from a company over time.
That makes sense for a lot of reasons. You get better cooperation from people when you cooperate with them, and show them everything they need to see.
Principle three is: Instill a sense of mission.
Nothing does more to energize your employees and your company than focusing them on the higher meaning and importance of what they do.
There's an intriguing book out called Drive, which questions the old carrots and sticks approach to motivating employees. It suggests instead that the modern knowledge worker wants to be inspired. For the highly skilled, mission-driven people of Freddie Mac, the national housing and economic crisis we're working to solve is a tremendous motivator – a cause to rally around. That's another reason our top priority for the next 18-24 months is the Obama Administration's Making Home Affordable program, which I'll get to a bit later.
Embracing the company mission tells employees, "I am one of you; I value what you value; I'm here for the same reasons you are." Establishing solidarity in this way helps reassure employees, customers and others that they can count on you in good times and bad. And it breeds loyalty, buy-in and confidence in what you're doing when you have tough decisions to make.
There's a corollary to letting your people know you share their commitment. You also have to defend the company – its people and its purpose – when the need is clear. One of the senior executive's highest duties is to stand up for the company against statements that could demoralize its people or harm its mission.
The fourth principle is: Develop a business plan that all employees can understand and articulate.
At Freddie, we developed a good, straightforward 18-24 month plan. In the short term, we needed to complete two necessary preconditions: complying with Sarbanes-Oxley Section 404 and implementing two new accounting standards, FAS 166 and 167. We needed to continue building credibility with decisionmakers by doing a strong job on the Making Home Affordable program, or MHA, and the rest of our mission. Finally, we needed to improve our infrastructure and business processes. Our goal in all this was to create circumstances such that policymakers will make decisions that are both good for the country and good for the employees of Freddie Mac.
Our employees have embraced this 18-24 month plan. They remain understandably concerned about Freddie Mac's future. But they are channeling their energies into hard work that is advancing our mission and helping lift the housing sector and broader economy.
The fifth principle is, communicate the company's values, mission and plan constantly.
You've heard me articulate the "what" of our plan and purpose. The "how" is straightforward. I use every communications channel at my disposal to communicate Freddie Mac's purpose, our performance and what we are trying to accomplish. This communications effort must also be consistent. My goal is to reach out to employees at least once or twice a week. And I never pass up an opportunity to connect what employees are doing to the larger goals of the company.
My sixth principle is to hire good people, then delegate freely, give managers autonomy and hold them accountable.
Good people, of course, are your great engine for achievement and your lasting legacy. That's why major hiring decisions matter so much. When I came to Freddie Mac last August, we had been operating for several months without a CFO and COO, so I focused on this intently from the start. The task consumed a lot of my time – but I knew it was commensurate with its importance.
Looking back, we've been happy with how we wrapped up the hiring process and with the high quality of our CFO and COO. They've tackled some of the thorniest challenges in the company, from dealing with major new accounting standards to heading up our massive business transformation and technology project.
All of which is to say, give those big personnel decisions the attention they deserve. Your efforts will be repaid. And the corollary is, if you've hired well, you can generally trust your people to deliver until proven otherwise.
The seventh principle is: Enforce teamwork and avoid silo management.
When companies lack teamwork and are split into silos, the wasted productivity and emotional energy is terrible. So one of the most valuable things a CEO can do is send a clear signal that silo thinking is unacceptable, and "what's best for the company" thinking will be rewarded.
At any company you join, senior management must be expected to cooperate with each other and act as a team. And this should be backed up with practical measures, such as compensation plans that insofar as possible reward senior executives based on the company meeting its overall goals, rather than individual departments meeting their individual goals.
The eighth and final principle is, learn by walking around.
There's a reason I spend so much time walking around, meeting with and listening to employees. A company that ignores its most experienced and committed people cannot possibly succeed. But one that values their contributions and ideas will win their loyalty and gain a leg up on the competition.
At Freddie Mac, we've also established a CEO Council that gives me regular and direct access to respected employees who provide insights and information about the company. This is one more way I try to break out of the CEO bubble and not rely on the usual management hierarchy alone.
Today's Housing and Economic Outlook:
The Crisis and Prospects for Recovery
So those are eight key principles I'm applying at Freddie Mac today, to help revitalize our employees and our company. Now I'll turn, as I said, to what we're doing with this reenergized company to help solve the housing and economic crisis. And to get a better picture of that crisis, I'll begin by reviewing the housing and economic outlook.
Nationally, there have been signs of improving economic activity, but housing remains fragile. The impact of this year's winter storms is hard to pin down, but our economists estimate that bad weather kept 100,000 or more workers at home during February. (Just as a few of you may have missed a class or two in that same period.) These workers likely returned to their jobs as the weather improved, and labor markets appear to be gradually healing – an important part of the overall economic recovery.
The same winter storms have also made it harder to gauge the housing market recovery. Home sales fell in January and February, and a drop in pending sales contracts suggests further weakness. One concern is that the first-time homebuyer tax credit prompted many buyers to rush to complete their purchases. But another possibility is that the bad weather kept potential buyers indoors. The next few months will be an important test for the strength of the housing recovery as these temporary distortions fade away.
We are guardedly optimistic that job market improvements and economic recovery will contribute to a pick-up in home sales this spring. Freddie Mac is doing its part by providing liquidity to the secondary market, helping keep mortgage rates near their historical lows around 5 percent. We are also working hard to help families keep their homes through the Administration's Making Home Affordable Program – which is my next main subject.
Our Ongoing Support to the Housing Market
In discussing Freddie Mac's role and mission today, I'd like to focus on two broad priorities identified by our regulator and conservator, the Federal Housing Finance Agency. First, I'll describe our stable, ongoing support to the housing market. Second, I'll discuss a primary focus of Freddie Mac over the past year: helping families avoid foreclosures.
With the markets still seized up, Freddie Mac has continued to provide a steady stream of funding for mortgages, every day, in all geographic markets. In fact, the two GSEs funded about 70 percent of all single-family mortgage loans originated last year. We also funded about 80 percent of multifamily loans – a market that will only take on added importance with the growth of rental housing today. All in all, by purchasing or guaranteeing well over half a trillion dollars in mortgages and mortgage securities last year, Freddie Mac helped more than 2.5 million families own or rent a home.
Compare 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, but it is. Freddie Mac's charter is to be in housing finance only. We stay in this market in good times and bad – even when other sources of liquidity have dried up. By contrast, as history shows, private lenders abandon the housing market when the going gets tough.
Freddie Mac Holds Almost a Quarter of the Market But Only 9% of
Seriously Delinquent Loans
|Sources: FDIC, Freddie Mac, Fannie Mae, Mortgage Bankers Association, HUD, First American
CoreLogic (LoanPerformance). Note: Data as of December 31, 2009. Seriously Delinquent loans were at
least 90 days delinquent or in foreclosure. Components may not sum to 100% because of rounding.
Freddie Mac and Fannie Mae figures include whole loans held in portfolio and in guaranteed securities
We also have an incentive to underwrite mortgages in a manner that is safe and affordable. As this chart indicates, 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 10 percent of first mortgages outstanding, but account for 28 percent of all seriously delinquent loans.
The point I want to stress is that about 1 in 25 of our loans is seriously delinquent. That record puts us among the very best in the industry.
Our Efforts to Avoid Foreclosures
Let me move to the second major duty of the GSEs today: preventing avoidable foreclosures.
Freddie Mac is a long-time leader and innovator in helping families keep their homes. In fact, over the past five years, we've worked with our servicers to help almost half a million seriously delinquent borrowers avoid foreclosure.
Nonetheless, with at least 5 million families today at risk of losing their homes, a national effort is needed to address these pressing issues. And we're striving to do our part.
The centerpiece of our efforts is the Making Home Affordable Program, or MHA. It includes both a refinance program and an anti-foreclosure program.
The MHA Refinance Program
I'll begin with the refinance program. Before MHA, it was difficult for borrowers to refinance if they owed more than 80 percent of their home's value … which has happened more and more due to house price declines. Our MHA refinance program is aimed at helping borrowers who are up to date on their payments, but ineligible for a traditional refinance, to take advantage of today's low interest rates.
Through the end of last year, we had refinanced loans for almost 170,000 families through MHA and other streamlined programs. Many borrowers have seen their interest payments drop by thousands of dollars per year. Added together with Freddie Mac's longstanding programs, we refinanced approximately $379 billion in home loans in 2009, helping 1.8 million families.
The MHA Modification Program
The second piece of MHA is a loan modification program. It's designed to modify existing mortgages so they're more sustainable for the long term. We initiated some 143,000 trial or permanent modifications in 2009, saving borrowers hundreds of dollars per month.
This may seem like a modest number of modifications when compared to the nation's immense needs. But remember that universe of at-risk borrowers we can help is less than a tenth of the total – which again is the fraction of all seriously delinquent loans held by Freddie Mac.
Challenge: high vacancy rates impact our ability to reach borrowers
Moreover, as this slide illustrates, the national vacancy rate for homes in which the borrowers are at least 90 days late in paying their mortgage stands at 35 percent. That means a huge number of the homes on which Freddie Mac would like to arrange a deal with the borrower are empty. Obviously, it's very hard to negotiate a mortgage loan modification if we can't even find anyone at home to talk to.
We've learned over the years that when borrowers 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 counsel at-risk borrowers – backed by a new $25 million investment.
This includes hiring experts to go to the homes of delinquent borrowers … knock on their doors … and explain calmly what could happen if they don't take action. They'll even help homeowners fill out relevant documents.
We're testing another innovative approach by opening several Borrower Help Centers in areas hit hard by the housing recession. These storefront offices are operated in partnership with our network of nonprofits, and they provide borrowers with free, holistic financial counseling. We're also providing such counseling over the phone through a national Borrower Help Network.
We hope to replicate these pilot initiatives if they're successful. The early signs are encouraging: we've already reached out to 17,000 more at-risk borrowers thanks to these new counseling initiatives.
I want to mention a new component of MHA called the Home Affordable Foreclosure Alternatives Program. When it launches next month, the program will make it easier for borrowers to avoid foreclosure through two methods – a short sale or a deed-in-lieu – both of which free a borrower from their mortgage without all the costs, time and effort, or long-term credit damage associated with a foreclosure.
All told, Freddie Mac helped more than 272,000 borrowers avoid foreclosure in 2009, through both our traditional methods and the MHA Program. That's more than three times the number in 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 Freddie Mac to have 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. I do think it's important we help introduce more facts into the debate, because only with good information can we expect good policy outcomes.
So, given the opportunity, what kinds of facts will we bring to the attention of decisionmakers? What are some of the key traits we believe the U.S. secondary mortgage market ought to include – and do the GSEs help provide them?
When asked, we'll remind decisionmakers that Freddie Mac helps enable the housing finance system to do a number of very important things:
- The GSEs help make possible the prepayable 30-year fixed rate mortgage – of a kind and on a scale that's unique to this country. By providing stability and certainty, this product 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." This lets our customers know there will always be a buyer for their loans – which gives them the confidence to keep lending in any environment and helps stabilize the market.
- We provide and respond to innovation in the mortgage market better than a purely government entity.
- And we are an important counter-cyclical influence that stays in the market even when purely private capital has pulled out. This has been proven time and again – including by the events of the last two years.
No one claims we're 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 our role in supporting MHA and the housing recovery is just the latest example. This public purpose allows us to be good stewards of taxpayer dollars – unlike say, banks, which appropriately are guided solely by private profits. And our federal support does not enrich shareholders; instead, it helps us provide liquidity and keep families in their homes.
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, as noted earlier. It means we're needed, we have a unique and vital role, and we are making a difference.
This urgent and meaningful purpose is why Freddie Mac's employees are the most committed I've ever had the privilege to lead.
It's why I believe they'll get through this crisis in good shape.
And why, with their special skills, they'll help the nation do the same.
Thanks very much.
And now I'd be happy to answer your questions – on leadership, my career path or any other subject.