Moody's Talks - Inside Economics - Cliff's Notes on Housing Finance

Episode Date: May 28, 2025

Cliff Rossi, Professor of the Practice and Director of the Smith Enterprise Risk Consortium at the University of Maryland, joins the podcast to discuss the future of housing finance and the potential release of Fannie Mae and Freddie Mac from government conservatorship. The team also delves into Dr. Rossi's proposal for fixing the homeowners insurance market and explores concerns surrounding private credit.Guest: Clifford Rossi, Professor of the Practice, Director, Smith Enterprise Risk Consortium Executive-in-Residence PhD, Cornell UniversityHosts: Mark Zandi – Chief Economist, Moody’s Analytics, Cris deRitis – Deputy Chief Economist, Moody’s Analytics, Marisa DiNatale – Senior Director - Head of Global Forecasting, Moody’s AnalyticsFollow Mark Zandi on 'X', BlueSky or LinkedIn @MarkZandi, Cris deRitis on LinkedIn, and Marisa DiNatale on LinkedInQuestions or Comments, please email us at [e-mail]. We would love to hear from you.  Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Sandy, the chief economist of Moody's Analytics, and I'm joined by my two trusty co-host, Marissa Dina Talley, Chris Duretis. Hi, guys. Hi, Mark. Hi, Mark. You see how I got that introduction, down pat. It's perfect.

Flawless. Flawless. Flawless. Even the timing couldn't have been better. Yeah. So how are things? I know this is early in the week. We generally record later a week because we have a guest, a special guest.

I'll introduce him in just a second. But how are things? How was your weekend? How was Memorial Day? Chris? It was nice. It was. It was.

It was. Yeah. What do you do at the De Ridi's household on Memorial Day? There's no Botech. But, you know, there's a... Oh, I've always wondered how you pronounce that. Boce. Boce.

Oh, I love that. Bacchi. There's no Bacchie. What's that? Is that the Philadelphia version of Bochie? Boce. Boce? What'd you say?

Say it again? Boce. Boce. Boce. I love that. But I can say that all day long. Boce. Boce. Boce.

We went to a nature preserve. Oh. We took a little walk. Yeah. Hey, have you ever been to Longwood Gardens? I have many times. Many times. Okay.

Yeah, that's a gem of the region. That's definitely a gem. Definitely a gem, yeah. Gone there many, many years. And Marissa, how was your Memorial Day weekend? Nice. Yeah. Didn't travel.

Stayed around and Barbie food. Beating anyone else at the pickleball? Yeah. I played pickleball. We had a, it was also my brother-in-law's birthday. So we did a pickleball barbecue tournament on Sunday. Did you win that? No.

Oh. Did you win any games? No. But you still have the win from last week. I do. I'll hang on to that until the day I die. Yes. I have that one win under my belt.

But no, it was fun. It was a nice weekend, hung out. And yeah. So on the pickleball thing, is that, you know, is it, are you, do you think you have promise or are you like, no? There doesn't seem to be much promise right now. I think I need to. I think I really need to take lessons, you know. Doing what I'm doing isn't, isn't exactly improving my game.

Right. Do you ever play tennis before the? No. No, I have like no tennis background. No. And, you know, I usually play singles, and this weekend we play doubles, which is how it's usually played, right? And it's a very different experience playing doubles and singles. So it was a little getting used to.

And playing outside, too. I also don't usually play outside. So you got the wind factor and the court's different. Oh, my gosh. Yeah. That was complicated. Yeah. It was fun.

When you play Boce, how do you say it, Chris? Boce? Watch it. Bace, Bache. Bache, if I say, when you play Bacchay, the whole wind thing is not an issue, my understanding. I've never played Bacch. Oh, that's a common misconception.

Really? There are all sorts of factors. Oh. The ground, I'm even spot in the ground. Oh, that I understand. Yeah, a little pebble here, a pebble there, you know. When you're at that professional league. Little cork from the Vino.

The Veno, the cork gets on the, The boat, how do you say it again? Boce? You know, yes, every, every factor. I guess we should get on to the topic at hand. We've got a guest. Welcome, Cliff Rossi. Cliff, how are you?

I'm well. Thanks for inviting me, Mark. Yeah, thanks for coming on. Clip, I know you from the University of Maryland. And Cirque, what does Cirque stand for? Smith Enterprise Risk Consortium. Oh, cool. That's not full.

Yeah. Yeah, it's very cool. But you've got a very storied kind of history and background. Do you want to give the listener a sense of who you are? Storyed is one word, I guess. You could call it. Do you play bocce? How do you say, Chris?

Well, down where I live, we call it botchy, but clearly I have a mismacuation. I'm totally with you. Bacchie I can get. Like this whole boochian thing. Perfectly fine. Exactly. It's all good. It's all good.

But yeah, no, I'm, my sound bite is I may, if I can still say this after about 17, 18 years, is still recovering chief risk officer masquerading as an academic these days. I, my trail of tears, as I like to call it, started off back during the last financial crisis before last. So if you want to go back as far as the SNL crisis, I was with the Thrift Regulatory Agency and then U.S. Treasury. I was actually one of the people that was credited with tallying up how much the cost of the SNL crisis was. You got the OTS? I was. I was.

I was. Was Ellen Seidman there at your time at that time? She was, exactly. Yes. You probably know a bunch of people that we worked with at the time. Absolutely. And then from there, I moved on to Fannie Mae for a stint. And then I was at Freddie Mac for about eight years.

in various capacities. I think the first role I had there, I was on the first team that built the industry's first automated underwriting system, a loan prospector, and I built the first FHA and VA automated underwriting scorecards myself that we had at Freddie Mac.

And then went on to do a bunch of other things, including heading up mortgage credit policies. I like to tell people, I left Freddie Mac at the end of 2003 when things were really tight from a credit standpoint. And then things, things fell off the rails thereafter, as we know. And then I went to the dark side.

So became the chief risk officer of a bank you may have heard of before countrywide, became the chief credit officer of another small place. Was that in 2003? You went from. I went to, yeah, I went to, yeah, don't ask me about my job hunting skills. But, yeah, I went to countrywide bank. I should make that statement, the bank on the parent, as their chief risk. officer. And then in late 2007, I went on to Washington Mutual and became the chief credit officer there.

It was the fourth chief credit officer in a two and a half year period of time. I should have known better, but didn't at the time. Tells you something about the job hunting market is all about asymmetric information on both sides. But anyway, and then I wound up as the managing director and chief risk officer for a hit the trifecta at Citigroup. heading up the risk side of consumer lending, including a $300 billion at the time mortgage portfolio and had to deal with the aftermath of that. So by the time I was, let's just say by 2009, I was completely burnt out from everything and decided, you know, life is short. And I had been an adjunct, actually, at the Smith School business for, gosh, my entire,

tenure at Freddie Mac and then I went ahead and they caught me on a moment of weakness now I'm teasing said hey you know we could certainly use a guy like you around here whenever you're interested in coming down and I did and so I've been with the university it's been my longest tenure anywhere I can't believe it going on in my 17th year starting this year and it's been it's been a great experience totally different from from an industry industry role but But as you mentioned earlier, this last couple of years, being the director of our Smith Enterprise Risk Consortium, has kind of taken me back to my roots, trying to get folks engaged as risk practitioners, as a community,

kind of to better understand, bring up our skill levels and our understanding and awareness of risk, trade, you know, ideas and practices that can help us better enhance what we do about managing risk. And that goes for, you know, we, unlike other associations, we actually are not just one sector focus, for example. We include banking and insurance and reinsurance and pharma and we've got aerospace and many others involved. So it's been, it's been a great community and we hope to continue doing what we do. Yeah, I guess I should disclose. I'm on your board of advisors. Yeah.

Yes, our advisory council, I should say. Absolutely. And thank you very much. And Chris has been a keynote for an event or two of ours and has been wildly acclaimed at that. So it's been awesome. Did you guys overlap at Fannie or that maybe you were before Chris's time? I'm probably way older. So I don't think so. I was in the early 90s. I think maybe Chris had just been born or something. Yeah. Yeah, it could have been. But the interesting, CERC is obviously, you're deep into the housing finance system and mortgage risk. But Cirque is much more than that, right? It's about all types of risks that the businesses face.

Yeah, absolutely. We put them into three buckets, basically. Of course, financial risk, right? So anything asset liability management, so the interest rate risk, market, liquidity risk, credit risk, if you want to kind of put it there as well. And then the non-financial risk, right, operational supply chain risk. So we spent a fair amount of time with manufacturing companies.

In fact, on the pharmacist side, oddly enough, I got involved quite heavily in pharmaceutical risk management. Several years ago when I was doing a couple of research studies for the FDA and helping build out an enterprise risk management framework for their office of pharmaceutical quality. So we got really involved with that. And then on the non-traditional risk side, right? So it's the cyber risk, AI risk, and climate risk. And we've been spending a fair amount of time on the climate risk side, particularly, as you probably were well, well, well versed in this, dealing with issues relating to homeowners insurance and the potential merging threats that that creates on. Yeah, we should come back to that. Yeah, that's when I've put together a proposal on that one.

is starting to get some traction, actually, in the halls of Congress and elsewhere. At least they're interested in hearing more about it, let's just say. Well, certainly, I'm in terms of a real problem in many parts of the country. Big time. Big time. Yeah. I saw a statistic that I think almost 10% of homeowners pay more in TNI taxes and insurance than P&I, principal and interest.

That's nationwide, more than 10%. I found that eye open. I mean, it is eye opening. And again, and, you know, you probably saw the Treasury report that, that dropped at the end of last year on homeowners insurance premiums and some of those things. And they have a nice little Excel database that you can kind of go through that's at the zip code level. And what was astonishing to me was that, you know, there were some zips that had, that the average annual homeowners insurance premium was over $20,000 a year. Now, these are in the high. higher end areas, right? So I think Palm Beach area was like somewhere about 40 or something, you know, but, but you think about that and you've heard the horror stories. You know, somebody has a $5,000 a year premium that goes to $20,000 next year. So yeah, this is, you know, the canary and the coal mine are certainly these areas that are in these coastal areas or in wildfire prone areas and whatnot, but it's, it's coming to a theater near you if we're not careful. So and there aren't very many solutions. That's the thing that's that you see. There's a lot of Band-Aid or very kind of. of like peripheral kind of, oh, well, you know, cat bonds are going to save us. And no, that's not going to save us or, you know, any of these other kind of parametric insurance is going to save us.

But anyway, that's definitely a topic for another time. Well, actually, we're here. I'm curious. You said you have a proposal that's making some progress in. Yeah, I do. So the proposal is to take a page from the topic of today around privatization. of the GSEs it was by the way i don't like that word privatization but we'll cut that's a whole different i don't like that what's a good point i don't like that word either and it gets thrown

about too too carelessly because yeah exactly okay we'll come we'll definitely come back yeah yeah so we'll agree that we will not use that word privatization here but the idea is uh basic idea is to to say that look uh current insurance markets are not functioning adequately and again you have to buy into the whole premise that this This is that perhaps there is some sort of market failure that has occurred. We can debate sort of what the nature of that is. But effectively, somebody isn't able to take on that catastrophic risk as effectively as they might otherwise in the pricing of these markets. So insurance companies right are facing significantly higher reinsurance premiums when they try to offload some of that risk.

And that comes back onto them and then they decide, you know, with 50 different state insurance commissions. you know, with all different sort of agendas, some, some are willing to go with rate hikes and some are not. Well, then what's an insurance company to do on top of all the other things that are pressing on them, but to either tend to withdraw or in some of those markets and not underwrite new policies or to basically, you know, go and have to price up. And so the proposal, as it, as it would work is that there would be a and again it would take it would it would take a congressional effort to do this but would be to charter a new gSE that would uh perform that function basically think of it this way and i actually talk about it in this paper was in the national mortgage

professional magazine and maybe mortgage banking magazine uh as well and it basically it would the way I'm thinking of it, it was take the NFIP, so the National Flood Insurance Program, and use that as kind of like the base model. Take that, pull that out of FEMA, because we know NFIP hasn't exactly been, you know, great at what they do. Pull that out of FEMA, created as a standalone GSE, and then build that focus on the flood part of it. And then over the, over a three to five year period of time, then start to build on. the other components. So the idea would be this. Each homeowner would have two policies. They would have a, what I call a standard homeowners insurance policy for things like trip and fall,

theft, those kinds of things. You know, water damage leaks in their home, that kind of thing. That's pretty easy to price from an insurance standpoint and would continue on and no problem. And the insurance companies would underwrite that and everything else. The other policy would be a a natural hazard policy. And it would be priced according to the area you live in, what natural hazards are most prominent and how that would be priced, but basically using a cat model of some sort. And on the back end, and here's where the fund began. So instead of the NFIP, as it is today, absorbing all that risk, taking a page out of what

the GSEs do today for credit risk transfer securities, we create a natural hazard risk transfer security and would push that out the back end and the natural buyers of those, right? Because you think about an insurance company or reinsurance company today struggles with how to price that risk, right? They've seen what's happened just in the last few years. Is that going to be a harbinger of the next few years? Who knows? And so they have a harder tie with that.

But if they could buy tranches of these risk transfer securities and say, well, you know what, if I'm an insurance company, I'm going to take the first or mezzanine loss of this position because I can now see that's what I want and they can replace that business that they you know because I was thinking at the beginning if I'm an insurance company I'd say well wait a second here you're taking all my business away this GSC's going to gobble it all up and like no not so much what they're going to do is they're going to repackage it and sell you that swath of risk that you want yeah exactly and the same for the reinsurance company they'll step out a little bit further out in the risk background to take that risk and and then the cat risk would be

held presumably by this national, you know, hazard insurance corporation, again, with all the issues that we face today on the housing GSCs, right? So, you know, what kind of guarantee we're talking about? And what's the mission and all these other U.S. attended the capitalization of this? All that still sits. But I'll just say this. Would that GSC have an explicit government guarantee? Well, again, I left that a little open. That's beyond my pay grade. But some sort of, I think, backstop has to be there. For the very reason that you and Jim cite about the implicit guarantee associated with Fannie and Freddie.

I mean, at the end of the day, if we're really going to go down this path, you can disrupt things pretty significantly if you mess around with that guarantee. Pretty cool idea. Chris, I know, Chris, you've been thinking about this. What do you think of that idea? Are you thinking of this as a matter of mind? You can be rude. You can be just don't. Yeah, yeah, I can take it. I've heard worse. Chris is so polite, you know? I actually do like it. Can I not like it? Oh, okay. Wow. Okay, there you go. Wow, you made my day. Are you thinking of all perils? I'm thinking all perils. Yeah. Okay, because that's been a big complaint of consumers, right? You had these. Right. No, they didn't have flood insurance. They didn't. Right. weren't required to have flood insurance and then the big storm came. Exactly. And one of the things that I also think about are the incentives, right? And so the classic one from flood is that, well, wait a second, how would this operate? And are we going to incent people that have a place on the outer banks, you know, that's built on stilts and it gets wiped out year after year. They get to rebuild. And the answer to that is no. We would have policies in place that would limit that sort of thing. But there's a lot of devils in the details about.

something like this, but fundamentally, something's going to have to give in the marketplace because it is, as you all know better than I, it's going to or is already having implications on market valuations of properties in these markets, and the demographics, and just all sorts of things, right? And so what I was trying to get out of this proposal was to have a conversation about we need to stop nibbling at the edges of this because anytime I've read any any are any any any pieces on on homeowners insurance it's always about you know 99% of the of the articles about about the problem and and at the end when they get the end there's not a lot of solution right and it's like we need a we need some you know something big has got to come out of this whether it's this

proposal or something else we got to really kind of rethink the way homeowners insurance well one way to think about it is if we don't do something something like this, then taxpayers are going to be on the hook ultimately anyway, right? Because yeah, exactly. The insurance industry is going to collapse at some point in who's going to be on the hook. This way, you actually, you know, the taxpayers backst up, but presumably that this GSC would pay a fee for that service. And so taxpayers would actually get paid for. Yes. You shouldering that burden in a rational way. So, you know, yeah. And then transfers of a lot of that, you know, instead of keeping it completely into the private investors, you know, there's that private

public kind of thing, you know, going on. So yeah. Yeah. And that gets to the current GSEs and Fannie and Freddie, but, you know, you're transferring, ultimately at the end of the day, if they transfer the risk through the risk transfer process, the private sector, private investors are actually taking the risk, not the taxpayer. That's correct. Okay. I got a, we'll see how good you are, Cliff. Which state has the highest homeowner insurance rate in the country. Chris, I'm hoping you know the answer to that question, Chris.

I think I know, but I, but I, you can chat GPT it if you need to. Yeah. I'm going to, I'm going to take a, a wag on this one. So, um,

what's a wag? Is that like a Baltimore thing? A wild ass gas. Oh. That's a technical risk term. I should have known that. That's funny. Um,

highest homeowners insurance rate. Yeah, it's a little surprising, I think. Well, I would have said Florida, but now what you said is probably taking me out of that game. Highest, Nebraska. Oh, I think he got it. Oh, my gosh, what a wag. That is a great wag.

It sounds like it was an informed guess. Informed guess. I don't think it was a wag. It's an IG. It's an egg, not a wag. I think it has to do, I could be wrong on this aspect of it, but Nebraska because of convective storms. Exactly. Things like that.

Exactly. Wow. You are good. You are. You could be on our statistics game any time. Which state has the lowest? As a lowest. And this may be changing.

This may be changing. It may have already changed. I don't know. I probably, shoot, that's a tough one. New Hampshire, Vermont. Give us an egg. Give us a hampshire, Vermont. That's probably.

good one. It used to be Hawaii, right? Oh, until the fire. It has the lowest. Yeah, it did. It did. I think Vermont might be moving in that category. Yeah, because of the fires, the Lahani fires. Yeah, I've heard, I've heard that if there's any place that you want to want to relocate to avoid natural hazards, Vermont. Vermont. That makes sense. Yeah. Yeah. That's interesting. It's cold, isn't it in Vermont? Maybe. My next 20 years, not so much. It's the new.

It's a new North Carolina. Exactly. I got a good friend of mine who's a climate scientist, and we went pretty closely on some of these things. And he's from Buffalo, and he goes, you know, he says, that's going to be a place to live. I know. No, no, not so much. But anyway.

Canada. Well, let's turn to Fannie and Freddie, and let me just frame it a little bit for the listener as best I can. So, obviously, Fannie and Freddie, the GSEs that are key to the housing finance system, they account for, correct me if I'm wrong, but probably about 40, 50%, typically of all mortgages that are originated, you know, kind of middle income households generally, kind of bread and butter mortgages, 30 or fixed. They obviously failed in the financial crisis back in 2008 and have been in government, so-called

government conservorship ever since. So under government control. In fact, I think it may be the last thing that's unresolved from the financial crisis. I mean, there was a lot to disentanning. Yeah, a lot to disentangle there, but I think it's the last thing to kind of resolve. And there's been more interest in this recent about what to do about Fannie Mae McAf, you know, should they stay in conservatorship? Should they come out? If they come out, how should they come out, so forth and so on? And this gets the question of, I don't like the word privatization because in my view, they've been effectively privatized through the risk transfer process. I'd say it's a release. You know, we're talking about a release of the GSA conservorship.

Recap, yeah. And so this is taking on more interest because you've got a number of investors in the shares of Fannie and Freddie that obviously are very interested in release because that would increase the value of their holdings. But there's also a lot of interest in the administration around this as well about taking them private. And there's been, you know, some conversations, important tweets and social media posts that have, you know, suggested that that's the path the administration wants to take. So, you know, with that as a frame, how do you think about this, Cliff? What do you, you know, how do you think about whether this is a good idea, a bad idea, you know, what it means for the more. industry and the mortgage finance system for homeowners.

Just an open-ended question wherever you want to take that. Yeah. Well, again, you know, I had, whether or not I was lucky enough or unlucky enough to be at both companies, I have, I work from that lens and can tell you, certainly in toward the end of my tenure with, with one of them, Freddie Mac, I could see. And then on the other side, right? So on the other side, I was working for companies that were selling lots and lots of loans to both of these entities. And I come back to it from the standpoint of both agencies worked exceptionally well for, what, 80 plus years before the 08 crisis came along?

You have to ask yourself, what caused that? Probably a conversation for another time. but I would go all the way back to the 2003 period and say, what I think really kind of precipitated things, and this is going to sound odd, is when the accounting scandals broke for both of them. The reason why I say that is that, again, at that time I was at Freddie Mac, and Freddie had a very strong risk philosophy at the time

that, you know, we, are going to do whatever it takes to preserve and protect that franchise. So during my tenure, and I was head of mortgage credit policy toward the end of that, we were definitely given the marching orders to keep credit very, very strict. In fact, I was involved with setting up the first, I don't know if you remember this back in those days, the first major market share agreements. We set, we went after Wells and set up a, you know, the dead of night almost. We all met in this airport, in the airport, Chicago airport, you know, whatever that the big hotel is there and got together. And we put that 100% market share agreement together.

And that's, that's to say that when you fundamentally, you have a duopoly here, regulated duopoly. And I'm not averse to kind of releasing them from their captivity of conservators because I think that brings certain. other things, right, you get this regulatory kind of whip sign that can go on from time to time where you get one administration in and it goes one direction and another one comes in, it goes another direction. And that kind of creates some instabilities in the marketplace. And you can look at things like the LLPAs, right, the loan level pricing adjustment changes that were made and all sorts of things that went on there that created some issues back in the day. What I would say is this.

when you fundamentally look at those two companies and you're thinking about releasing them from what they've been under in conservatorship, I think about, well, how do they compete? Well, they compete on really three things. They compete on service. They compete on product and they compete on price slash credit. Well, in a world where the common securitization platform has come along and you've got no difference in the securities, you don't have a Freddie Mac, participation certificate anymore or an MBS over here for Fannie Mae. You got them not completely aligned. They're issuing the same thing. In a world where the products themselves are virtually identical, single family, multifamily products are pretty much the same.

And a world where service is pretty much the same, if you want to call service things like their automated underwriting systems, their automated valuation, collateral valuation systems, all the other associated apparatus that goes along. That's all pretty much the same. So what's left? Well, price slash guarantee fee, that is, and credit. That is the underwriting.

And I saw that up close and personal. And in a world where you had weak regulation, weak regulator, an insufficient capital and large portfolios, it didn't take long for these companies to start. to toward the tail end of that, right, 05, 6, and 7 in particular, start to move into, I remember back in my time when we was first presented with, well, we need to compete with Fannie Mae's expanded approved product. And I'm going, why in the heck would we do that, right?

Why would we go down this path? This is terrible, right? We can't understand that product. Well, those kinds of things come to mind. And I go, well, if we're going to do anything, I think we need to start. if this is a perfect opportunity for the administration to sit back and say, what do we want our secondary market to look like, our mortgage secondary market to look like.

This is a, you don't get too many opportunities like this to get it right. We want to have a strong regulator is the first thing. You want to have somebody who gets strong oversight to that. Not a regulator that is, that's, that's, that's too strong, right? Because I think, I think, you know, it's just, it's kind of like the Goldilocks thing. is the two, don't want a too hot, too cold, you know when you see it. But on top of that, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I, I been proposals over the years to say, well, maybe we need five, maybe we need three,

whatever it is. Maybe we need to have two of them again going forward. But I really question why, why, why we need two at all, because at the end of the day, that, that, that, that that competition that, that is there, I mean, I, I, I, I personally have seen, you know, you know, at times where back in my time, but CEOs that I work for were beating down the guarantee fees at one of the other GSEs in order to get a major market share agreement from them. And totally underpricing that credit risk that ultimately those GSCs were taking. So I do wonder if keeping them, you know, recap and releasing them as they are today makes sense.

I also worry, and I think this, it resonates totally the piece that you wrote Mark a while back here with Jim, that if privatization that that word is used and people say, well, that comes with no government guarantee, I think that's a complete non-starter. Complete non-starter. I don't know how you can have the size of the marketplace that we have today for mortgages, the fixed rate 30-year mortgage, all. those things that we've come to see and believe in without some form of government guarantee. And I would simply fire advising folks in Treasury or FHFA, whoever else is involved with us, I would say, and I think you've heard Besson even say this. Like, we're not going to do anything that's going to, we're going to look at mortgage rates, we're going to look at these things before we make a move. And I think you have to be very thoughtful about that before you touch it.

Because once you do, given the size of the marketplace, it would have such a, disruptive effect on the economy, it would be worse than doing nothing at all. So those are kind of some of my big thoughts about that. So let's unpack that a little bit or a lot. So going back, they're in conservatorship, the question is release into so that they become private entities, private financial institutions, with some form of backstop from the federal government, because without some form of backstop, the nature of what they do will change completely. They won't be able to issue 30-year or long-term fixed rate prepayable mortgages. That'll become a shadow of what it is today.

And if the goal here is to continue to make sure that that's the kind of the mainstay of the mortgage finance system, you have to have some kind of backstop. So if you go down the release path, like as being discussed, that has to be part. part of the equation in some form or another. That seems to be one thing that you're saying. Without that, it doesn't work. Rates will be a lot higher for 30-year-fixed, 15-year-fixed. It just won't work.

Okay. The second thing you're saying then is, okay, if we release them, let's think about what the system should look like in that release, and you are advocating arguing we should have one GSE, maybe some merger, some combination of these Fannie and Freddie into one entity. And the reason you're arguing that is, and by the way, let me preface it by saying, I was kind of where you were, you know, 10 years ago on this. We need one.

In fact, if you go back to the papers that I wrote with Jim Parrott, we advocated for one. Then I had this long conversation with Don Layton, you know, the former CEO of Freddie. Was he your boss at one point? No, he wasn't. Oh, he was in conservatorship. He was in conservatorship. And he made the point, a couple points. One, he says, trying to combine these guys because the two largest, close to the two largest financial institutions on the planet.

Good luck with that. That's going to be really hard to do. Second thing he said that, though, resonating with me was it's not bad to have competition. You need a little bit of, you need that competition. Otherwise, they lose the focus on. service and there's less innovation. The Freddie has, and you know this better than I, I'm just parroting what I heard, that Freddie has a different culture, different perspective than Fannie, and it's not bad to have those two

different perspectives, that having both those perspectives lands us in a better place. That doesn't resonate with you. Not all. No, not at all. Not at all. I would, I would, on both of those things, I would. I would, first of all, I'd say, yeah, they may have different cultures, but again, who would have thought we would have been able to have eliminated having two different securities for each, that there would be a common securitization platform or common security, right? That was a heavy lift and they accomplished that.

And again, I come back to, and cultures are cultures, right? How many banks have we seen over time, you know, that have merged in with other organizations that are, you know, with investment banks and banks. banks together. So I'm not a buyer on that. And the last thing on the competition side, I think they ought to be a financial market utility, flat out of financial market utility. At the end of the day, there were too many, the competition got too fierce, let's just say. Saying it competed to the bottom. And then you're going back to the bottom. But back to back to my argument that they don't have much to compete on other than price and credit. And you don't want that. And they, and they, and they, and they,

did. Well, and it was compounded right against some of that. You wonder how much of that would have happened actually if Opho, if we had FHFA instead of Opho. Opho was pretty weak regulator. But at the end of the day, I'm not a, I thought along, I think 10 years ago, I was, I had written pieces where I think I was at, maybe we should have five and we should have more competition. And then I was always on two. I was on one, then two, and then they, I got, forced into five because I thought maybe we could get that done. But, you know, I always, I always thought, too, was right now. Chris, do you have a view on this, on this particular part of the debate? Well, first of all, do you hear anything from, from Cliff that you would take umbrage with?

No, I think we have shared lived experience, right? So a lot of the things he was talking about. So you want one, you want one massive. One utility. I mean, when I think about that. That's going to be like a, what is $7 trillion financial institution? No? But they're acting like a utility, right? They're not actually, okay. In my view, they are, they're the transformer, right? They're providing the liquidity to the lenders and not the back end.

They're laying off as much of the risk. They're just an intermediary of risk. They take the interest. They funnel it through. They take the credit risk. They funnel it through. So why do it's not when you say seven trillion, that's overstating the complexity that what's involved here.

That's right. I think so. And it's the economies of scale that we're after here, right? Maybe I'll go back to one. Yeah, well, and here's another. thing to think about it the beauty about the two of these two institutions they they are set up almost identically right yeah they have a very huge single family division they have a multi-family division they have an investments in capital markets division the the consolidation is actually

from that from that standpoint is is pretty straightforward it's not like they have you know bringing a city group in with a jp morgan and trying to put all that those pieces together would be really really tough but you're talking about really only three to divisions here. And they're all the same. I mean, so and, you know, the current administration would, I would think would like that because they're looking for economies of scale and things of that nature. And in fact, here you have the FHFA director now heading up the boards of both these companies. That's when I heard that, when I heard that statement, I thought, hmm, I wonder if there isn't something. They're thinking along those lines. Yeah. I don't know. Yeah. Well, I was going to

I saw those side deals as well. I was going to say the lenders were playing the two off of each other, you know, like an art form. They knew perfect. I saw these one G-fee deals going through. I guess it depends on your perspective. That was argued to be a feature, not a bug, because you got better service. You got competition. That's a good thing.

You end up with a better product. Well, if it was the service, they were just, but the service, you know, that was pretty comparable across the two. They were really competing on price, right? and they were undercutting the G-fees to the point in some cases. Well, if you have a strong regulator and the regulating price, then they got to compete on other things. They got to innovate. They've got to come up with different ways.

Well, anyway, the other thing that Don said, which I found what's interesting, maybe it doesn't matter anymore in the current context, is he said politically doing that would be forget about it. Yeah, I agree with that. Yeah. It's in this environment, no chance. Yeah, that'd be a tough one.

just making a just simply because you're making an even larger. Well, he was making the case that you can fire all these people. So that's why I say maybe in the current context it's easier. Right. Yeah, probably in this context. I was thinking less about that than I was just the, if you have to do anything with Congress, right? If this couldn't be done administratively, then then it's, nothing's going to happen on that one. But I think if you were, if you were the housing czar for.

day. I was. That's the road I would take. I would combine them. I would ring out the inefficiencies that they tout that they want to get rid of to begin with. And I would remake this into a financial market utility, kind of a Ginnie Mae like. There have been discussions in the past about maybe some of the some of the structure of what we have could be made more like a Ginny May with the investor credit investors over over in a different world. But just to kind of keep things clean, I would just kind of combine the two for all the reasons that I said earlier. I think, you know, again, as I mentioned before, it's, it's hard to imagine what it would have looked like if FHA had FHFA had been in place. But I also know that even with FHFA, they take their marching orders

from the administration. And from that standpoint, things could be, could still have been not too dissimilar from the outcome that we saw in 08 too. So I think the competition thing really bothers me a lot and has over time for reasons that, you know, Chris has mentioned before that they, you know, we see them compete on price a lot.

And that, that has to be solved for, I think, in the next round. But I am not, I can't imagine that they would move these two out of concert, these two companies out of conservatorship without having some backstop. And at least an implicit backstop. I know they say, oh, well, you know, they've got this much larger line of credit from the treasury than they've ever had and all this than the two and a half billion they had originally. But I'm like, I'm not a buyer because the market's not going to buy that.

And the rating agencies, when they start to start rating the death, they're going to say, wait a second, on a standalone basis, just not so much. So that's, that's kind of where I come down on that. Well, just for the record, I, unless there's legislation, I'd like them exactly where they are. Just keep them there because otherwise it's going to be a bit of a mess. But I'm going to ask you an unfair question. All the questions I've asked so far are fair. The unfair question is, what is the probability that there will actually be some form of release in the next couple, three years?

you know that's if you had if you'd ask me that question what a week and a half ago or whenever the yeah trump came out with a statement i just said very low probability i just said maybe in the 25% or less category only because they've got way other things going on right now that they need to deal with but when he came out with that statement i was a little taken aback because i thought well this sounds like this could actually that they haven't put that away put that to bed they're actually going to maybe think about doing something and so I would put a probability

in the next several years I would say what better than 50% and we may get a signal better than 50% I think they're going to at least try to do something oh yeah I think they'll try but if they but maybe maybe cooler heads will prevail and we'll say yeah you know maybe behind the scenes treasury saying yeah that's a big risk you don't want to take right now so but i'd say that's 50% from i don't know what have i know professor rossi

says over 50 what do you say man what do you say he's always been higher than it was a few weeks ago but i still low like so daunting and it is daunting but does that mean that they're not going to take that on. I mean, they've done a lot of things that I would otherwise not have thought they would have done quickly. And so, right, that's, you know, move fast and break things, kind of a mentality. So, Chris, you want to put a number on it? I'd say 25, 30 percent. 20. 30. Bruce, do you have a view on this one? This might be a little esoteric for you. No, I don't think. Yeah. I don't think I do. Yeah, I'll split the difference between you guys. I'd say 40%.

Okay. That's definitely, they're going to take a crack at it, high over even, but my sense is that they're going to figure out that in the context of all the other things that are going on, this is going to be pretty tough to pull off without, you know, the other thing is mortgage rates are really high where it's at $10. Exactly. And this isn't going to put, this isn't going to lower mortgage rates. This is a question higher.

And it just creates more volatility in that, you know, raises the spread. So I just think it's going to be, that's going to be tough. to over yeah yeah i may be uh you know having egg on my face with that 50% handle out there well i just say one thing chris never loses a bet so chris do you want to bet cliff a dollar he never loses he never i don't know uh yeah that's a bet a dollar says a dollar i could do that by the end of 2025 in in the next few years yeah sure yeah sure does that that doesn't mean they're actually that they've consummated the transaction though right just yeah no no that boy See how careful he is?

That's what it risk. You see Mark? That's how it's done. That's what it is. He's already drafting the contract. The catassals. So, okay, but we're running out of time. So, Cliff, since I have you, what, and I've been asking anyone in the financial industry,

financial system, the same question, because I get the question all the time. What is going to do us in? that we're not paying attention to. Is there anything out there in the system, financial system, financial markets, financial institutions, anything that is kind of sort of out there on your radar screen, you're saying, hey, I feel a little uncomfortable about that. It may not be a problem today. It could be a problem down the road.

The direction of travel continues as it is today. Anything out there that you want to call out? I'd be keeping an eye on the whole private market sector. private credit sector yeah private credit yeah private credit is one that um you know it doesn't keep me up at night but i i i what is it it's about two trillion dollars or so at this point you've got pension funds rolling in and uh you know you've got insurance companies that are players and sovereign wealth funds and it starts to feel a little bit about things that we've heard about back you know 17 years ago i'm not saying it's any of close to that but

it does smack of some things where you've got there's a lot of direct lending going on, a lot of proliferation of the integration between some of these private credit groups and traditional banking. And that feels a little shadow banking like to me and feels like that, you know, there are all these synthetic risk transfer things going on between some of these institutions. And I'm not again saying out. We'll say, hey, the sky is falling. But I watch a little bit of that.

And you hear people talk a bit about private credit when they're not talking about AI and other things that are going on. But that's one that I would keep an eye on simply because it's, it's, there's been more money coming into it. But bad things can happen, right? We're talking highly illiquid assets, hard to unload with when the bad times hit. These are, you know, hasn't been tested. in tough markets, lots of leverage, potential for defaults, you know, not very well regulated, a lot of increase in underwriting risk, and that spillover effect possibly to banking. So that's probably one that I would keep an eye on, but like I said, it's probably not one

that's going to bite us tomorrow. Well, you know what? I've got a paper coming out next week, next Tuesday. I'll send you a draft. It's on the market markets and trying to. to assess how systemic they are. You know, it's a very statistical piece kind of using different data sources and econometric approaches, try to infer how interconnected private credit has become with the rest

of the system and how much of a risk it poses. But I'll send it along. I'd be very curious. That'd be great. I'm always envious of you guys sitting on top of all this wonderful data, you know, and do all this fun stuff. The data's pretty cool. Yeah.

Yeah. Yeah, it reminds me of a C. of a major bank once told me that if it's growing like a weed, good chance it's a weed. Yeah. For all the private credit folks out there, I'm not calling you a weed. I'm just not doing it. But if you're growing really fast and at the same time, you're bragging about how fast you're going to grow in the future, my antenna go up. Yeah.

And I'm unfortunately, I've worked for a couple of those banks in the past that were just like that. And so I bear the scars of my PTSD is still here today. Well, I guess that's a countrywide, kind of the rapid growth there. Countrywide and, you know, Wamo and its earlier days, right, you know. Hey, Cliff, it was really very nice to have you on. I really appreciate it. Thank you for taking the time. And it was a great conversation.

And we'll work on that contract on that bet. Okay. All right. But I'm just telling you, I'm just telling you. No matter how you write it, I wouldn't sign it because he never loses. He never loses. That sounds like the house, you know. They're always going to win.

Hey, thank you so much for having me on. I appreciate it. It was a great conversation. Yeah, we'll have you back for sure if you're willing. Guys, anything else you want to say before we call it a podcast, Chris, Marissa? I just thank you. Thanks for coming on. Yeah, excellent.

Well, okay, with that, dear listener, we are going to call this a podcast. Take care now.