Sec­ondary

Don­ald Lay­ton, who has run the mort­gage gi­ant since 2012, dis­cussed the busy agenda lead­ing up to his de­par­ture and says Fred­die can serve as a “tech­ni­cal ad­viser” in GSE re­form talks.

National Mortgage News - - Contents - By Han­nah Lang

‘We do not de­ter­mine our des­tiny’: A sit-down with out­go­ing Fred­die CEO

Don­ald Lay­ton has just un­der a year be­fore he re­tires as CEO of Fred­die Mac af­ter more than 40 years in the fi­nan­cial ser­vices in­dus­try, but the com­ing months are shap­ing up to be some of the most for­ma­tive at the com­pany since Lay­ton joined in 2012.

In June, both Fred­die and Fan­nie Mae are slated to roll out a uni­form mort­gage-backed se­cu­rity, which ex­perts have high­lighted as a key move in any hous­ing fi­nance re­form plan.

And in Novem­ber, the com­ment pe­riod will close on a pro­posed cap­i­tal frame­work for the two govern­ment-spon­sored en­ter­prises. These poli­cies will be loom­ing as both Fred­die and Fan­nie search for new CEOs, and as the pub­lic awaits Pres­i­dent Trump’s ap­point­ment of the next head of the GSEs’ reg­u­la­tor, the Fed­eral Hous­ing Fi­nance Agency.

Lay­ton sat down with Na­tional Mort­gage News dur­ing the Mort­gage Bankers As­so­ci­a­tion an­nual con­fer­ence to talk about what he has learned from his ex­pe­ri­ence and what to ex­pect be­fore he re­tires.

This in­ter­view has been con­densed and lightly edited for clar­ity.

What is in store at Fred­die be­tween now and your re­tire­ment?

DON LAY­TON: Ob­vi­ously, there’s the pri­or­ity of suc­ces­sion. I’d like to point out that we have triple suc­ces­sion, not just me. There’s me, there’s go­ing to be a new head of the FHFA, and how much that’s a change, we don’t know. We’re go­ing to find out. The third is, just by co­in­ci­dence, our board chair.

De­spite that, if the govern­ment, and I mean govern­ment very broadly, is spend­ing time on hous­ing fi­nance re­form of the fu­ture, we have a brand as the best tech­ni­cal ad­vis­ers around town, be­cause it’s a very com­pli­cated busi­ness, so a pri­or­ity would be to help them.

Com­pet­i­tive­ness is built into our DNA — I just have to keep it go­ing. We’re start­ing to think a lit­tle bit about the down cy­cle. It’s been a great run up. I don’t think there’s go­ing to be a strong down cy­cle, but we have to be pre­pared for it.

What­ever we can do to help to land [the pro­posed rule on en­ter­prise cap­i­tal] and bring that to fi­nal­ity is im­por­tant to us. We’re an ex­pert on that, we care about it a lot and we de­vel­oped the kind of father to the sys­tem that even­tu­ally came out. The com­ment pe­riod ends the mid­dle of next Novem­ber. The fi­nal­iza­tion of it should tie in … with my re­tire­ment.

It’s been an ex­cit­ing five years. The last five years and the next five years is very ex­cit­ing in the mort­gage busi­ness. It’s a very con­torted and old-fash­ioned busi­ness that’s be­come mod­ern­ized in all these ways. It’s great. If you go talk to some­one who’s in a ma­jor mort­gage com­pany, they’ll tell you there’s been more change and in­no­va­tion in the last five years than in the last 25 years.

How has Fred­die Mac changed as a com­pany since you started?

Re­mem­ber, I took this as pub­lic ser­vice; I al­ready had my ca­reer. I was not try­ing to bur­nish my re­sume.

Sim­ple fact is Fred­die Mac, the GSE sys­tem, which I ex­pe­ri­enced back as a banker, was not very com­pet­i­tive, not very com­mer­cial. It was very pol­icy-driven, ex-govern­ment agency style and I’m not an apol­o­gist for the old sys­tem. They did some good stuff, and they did some things that eroded con­fi­dence. They made them­selves po­lit­i­cal is­sues be­cause of the un­lim­ited in­vest­ment port­fo­lios be­ing used.

It be­came, “Help build some­thing that we can be proud of,” where you took the

core value that you’re there for as a mis­sion and op­er­ate it well. That’s what led to credit risk trans­fer, the cap­i­tal sys­tem — all those things. That’s largely done.

I have said this be­fore: His­tory books like to de­clare eras. My era was the era of: Make the com­pa­nies work well in con­ser­va­tor­ship. Prior to when I got there, they were still deal­ing with the fore­clo­sure cri­sis and were not able to fo­cus on so­lu­tions at all. And the fore­clo­sure cri­sis kind of peaked, and it’s still around, but the thought process was mov­ing away. … It was make qual­ity com­pa­nies that can do the job well.

What role should Fred­die play in hous­ing fi­nance re­form?

We do not de­ter­mine our des­tiny. We should be great tech­ni­cal ad­vis­ers to ev­ery­one work­ing on it and we should ex­e­cute well, and that’s the role of the com­pany. We’re not sup­posed to be in there lob­by­ing for one so­lu­tion or an­other. The only thing you’re sup­posed to be lob­by­ing for is some­thing that works over some­thing that doesn’t work, be­cause you have good tech­ni­cal. It’s not like you have a big con­flict of in­ter­est. The FHFA’s in charge and you get paid in a way that doesn’t make it a con­flict of in­ter­est.

Part of Fred­die Mac’s mis­sion is to make home­own­er­ship more af­ford­able. How has Fred­die Mac done that so far, and how will it con­tinue to do that?

There’s a big squeeze. House prices bot­tomed out in 2011, and de­pend­ing on your in­dex, have grown about 5% since then. That is higher than nom­i­nal in­comes, which means on av­er­age in Amer­ica, hous­ing is more ex­pen­sive rel­a­tive to your in­come, and this is usu­ally most vis­i­ble in renters pay­ing larger per­cent­ages of their in­come to rent. It’s eas­ier to see than the cost of own­ing a home, which has lots of com­po­nents, and so the per­cent­age of peo­ple’s in­come that they’re spend­ing on their res­i­dences are go­ing up and up and squeez­ing ev­ery­one else. That’s not good. Ideally, we’d like the cost of hous­ing nom­i­nally to go up with the nom­i­nal in­comes, cer­tainly not higher, the way it has been. We are a pol­icy or­ga­ni­za­tion.

There are laws about us. We should be help­ing af­ford­abil­ity; we’re not sup­posed to be a honey pot for politi­cians to raid and give money away. The FHFA di­rec­tion is clear. There should be qual­ity credit … and it should be sus­tain­able. … Now then what the FHFA wants us to do, which we love, is be cre­ative about how to cre­ate more hous­ing, which we can fi­nance a lit­tle bit, more in the mul­ti­fam­ily space, and work some of these pro­grams to help af­ford­abil­ity. I don’t pre­tend they’re go­ing to be the gi­ant so­lu­tion to years of house-price growth be­ing part of in­come, but def­i­nitely at the mar­gin it can help.

A Se­nate hear­ing sched­uled for Oct. 18, which was post­poned, had been ex­pected to look at so-called mis­sion creep con­cerns about the GSEs. What were you plan­ning on say­ing at that hear­ing?

In terms of the Se­nate [Bank­ing] com­mit­tee’s an­gled at­tack, we would have told them as we have said to other venues … our job is not to spend our time wor­ry­ing about what the new sys­tem could be. It’s to make the cur­rent sys­tem as best it can un­der ex­ist­ing laws. That’s our job in con­ser­va­tor­ship. We think we’ve done a great job of that. That means fol­low­ing the con­gres­sional ini­tia­tive given to us in the char­ter [and] that means ad­her­ing to lim­i­ta­tions on the char­ter.

This is not a mi­nor, quick, su­per­fi­cial process. Ev­ery­thing’s char­ter-com­pli­ant, ev­ery­thing goes di­rectly to the mis­sion, which we sum­ma­rized in three words: liq­uid­ity — we buy from the pri­mary mar­ket, sta­bil­ity — we have the sys­tem be­ing more sta­ble, and af­ford­abil­ity — we try to keep this process pos­si­ble. The FHFA does not let us do stuff just to ag­gran­dize or buy a mar­ket. It has to have that mis­sion so­cial value to it where it does some­thing about af­ford­abil­ity. IMAGIN is a clas­sic. It solves sta­bil­ity is­sues, it solves af­ford­abil­ity is­sues [and] it’s cheaper to the bor­rower in the long run.

How much of a say do you have in the hir­ing process for the next CEO?

The an­swer is I have a mod­est say. The hir­ing is a triple-level hir­ing: board, FHFA and Trea­sury as op­posed to a nor­mal cor­po­rate board. I am a mem­ber of the board, so I get a kind of say. … I help them con­struct the process. There’s a search com­mit­tee on the board, and I’m not on that. It’s all sub­ject to FHFA ap­proval at the end of the day.

What ad­vice do you have for your suc­ces­sor?

Build up what we have. Re­mem­ber the peo­ple and the man­age­ment team at the core, be­cause you can’t do it all. The eas­i­est thing about be­ing a CEO is you’re not in charge of the busi­ness, you’re in charge of peo­ple who are in charge of busi­ness.

It’s high-qual­ity team first — by the way, that is go­ing to be an is­sue, be­cause we do have a lot of peo­ple who are older at the top. Ages be­gin with a 6. The next per­son is go­ing to have to re­view man­age­ment teams, your in­ter­nals and your ex­ter­nals.

What’s next for you?

When this is over, I’ll be 69 years old. I’m not go­ing to work full time again. I was al­ready re­tired. This is my third re­tire­ment, so now I’m old. I’ll do what’s called a port­fo­lio of ac­tiv­i­ties, where you have a life. I may join a board or two al­though my age may be in­volved in there in terms of term limit. Maybe do some non­profit work, which has been hard for me with the back-and-forth be­tween New York and here, and some in­vest­ing.

I am highly likely to try and stay in­volved as an out­sider in hous­ing fi­nance pol­icy. I find the gap in knowl­edge be­tween an in­sider ver­sus the gen­eral out­side pol­icy com­mu­nity to be quite large, and so at least for a few years, I will be in a po­si­tion to re­ally help the de­bate, I think.

I’m ex­am­in­ing ev­ery­thing from writ­ing a book, to do­ing the blog posts, to join­ing a think tank — those are not mu­tu­ally ex­clu­sive. In this job, I’m re­stricted in what I can say out­side, but once I’m out, then I can help.

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