Moody's Talks - Inside Economics - Shelter from the Storm(s)

Episode Date: June 16, 2023

The Inside Economics team takes shelter from a tornado (true story), and Mark Calabria, senior advisor to the Cato Institute and former director of the Federal Housing Finance Agency, describes the FHFA’s efforts to provide shelter to the housing and mortgage finance markets during the pandemic. His new book “Shelter from the Storm,” is a fascinating telling of that difficult period.For more on Mark Calabria, click here.For more information on Mark Calabria's book "Shelter from the Storm," click here.For the full transcript, click here.Follow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn for additional insight. 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 Chris Duretis. Chris, good to see you. Mark. No Marissa, huh? No, Marissa today, unfortunately. Be back soon. Good.

So it's me and you solo. Have we, I don't think we've ever had a podcast when it's just me and you. No, no, that's right. That's right. Are you up for this? I'm ready. Go for it. Well, I should say this podcast has really two parts to it. Part one is what we're doing now.

And I think a lot of economic data came out this week. The Fed met, a lot to talk about. So we'll do that. But we'll keep it relatively short because part two, we have Mark Collabria joining us. Mark was the former director of the federal housing finance agency, FHFA, the regulator for Fannie Freddie and the federal home on bank system. And that, we recorded that part of the conversation earlier today. We got interrupted by a tornado warning. We all kind of scrambled here, get into the basement. Fortunately, passed by pretty quickly. I don't think a tornado actually has come down, at least not so far. And so we cut that off. But that was a good conversation.

We'll come back to that in a little bit. But here we are. This is now June 16th, a busy week on the economic scene. Where do you want to begin, Chris, the consumer pricing? I don't know. There's a lot to pick from. What do you want to chat about? Yeah, there's a lot of data that came out this week.

Some maybe conflicting signals or depending on what part of the argument you'd like to make, you can find data to support your view. But let's maybe start with CPI because I came out on Tuesday. And overall, I'd say a pretty good report in the sense that CPI is coming in, the consumer price index of inflation is coming in, maybe not as fast as everyone would like, but maybe as fast as would be reasonable to expect. So, yeah, let's dive in there. Yeah, so this is kind of the way I frame it in my own mind.

CPI inflation, consumer price inflation peaked at 9% on the nose June of 2022 a year ago. We got a data point this week for the month of May. four percent ish. Was it exactly four, I think, wasn't it? Four on the nose. Yeah. Year over a year. Oh, I should say, yeah, year over year.

That is important. It feels like we can state with, at least I can state, I'm curious whether you would agree, that it's going to continue to moderate. We're headed towards three here, towards the end of the year, or 3% year over year and going into next into the twos.

And the reason I'm confident in that forecast is two things. One, vehicle prices now, new vehicle prices are falling and that'll continue. Use vehicle prices rose in the month, but it feels like they're going to start declining because auction prices are down, and that leads the CPI for use vehicles by several months and that's going to happen. And more fundamentally, what's happening is we're getting more vehicle production globally and that's allowing for more inventory on dealer lots and starting to take pressure off price. Second, more importantly, the cost of shelter housing services, that's going to slow. It's kind of sort of rolled over already in terms of growth rates,

but it's going to slow much more noticeably over the next six, nine, 12 months because that will reflect with a lag, the fact that rents have gone flat to down. So that feels like the, that's where we've been over the past year and where we're headed over the next year. Agree, disagree. Anything you want to say about that? Yeah. General trajectory, definitely agree. I guess one thing to note is that you mentioned CPI, the headline number was 4% year over year, but the core CPI was 5.3%. So a lot of that decline that we've seen has been really energy driven, right, as energy prices have fallen. And they fall a lot this month and over the past year as well. And food. And I guess that might be energy too, because that goes back to diesel. And diesel

is key to the food prices. But that's kind of rolled over here, 200 of your basis. Yeah. Well, but it's still pretty high though, right? Oh, yeah. And that's another point. Energy prices are down, but all other prices are a lot higher than they were, no doubt about it. Yeah, food is coming in. But it has to come in more to really help, particularly those lower income consumers that are most exposed. So I don't disagree with the path. I think the real test is the speed, right?

Is it going to come in fast enough for the Fed to be satisfied that they can indeed be patient or if this continues to slowly come in, do they feel like they need to step on the brakes again and slow things down? Right, right. So I was going to say something. What was it? About inflation.

Oh, this is it. I should ask, are we going to play the statistics game, the two of us? I don't know. is that feels a little weird. That's a little weird. So maybe we should, we can't. So I'm not, I won't take anybody,

I'm not going to be worrying about taking any, your statistic or my statistic. Yeah, just go for it. Yeah. Go for it. We'll go for it. Okay. Do you see the University of Michigan survey today,

came out today? I just saw the headline. It was up a little bit, right? Yeah, but you know what was most significant was inflation, one year ahead inflation expectations. That, you know, the University of Michigan, does this,

every month of consumers, and one of the questions is, what do you think inflation is going to be over the next year? It fell sharply to 3.3 percent, right? That's pretty good. Last month. Right. Now, of course, the thing bounces around a lot month to month, so I'm not sure I'd read all, you know, all of what that would seem to suggest on face value. But it does seem to say that inflation expectations are coming in because, in fact, the peak was back in early 20.

2022, inflation expectations one year ahead, you miss was 5.4 or 5.5.5%. So that seems to be moving in the right direction as well. That's a good sign. It is. But is that just gas prices? Oh, yeah. Absolutely. But that's key. That's key. Right. Yeah. But that's important to wages, right? Because inflation expectations, consumer inflation expectations, which is what this is, drives in significant part wage demands because workers say, hey, you got to compensate me for the fact that I got to pay more to commute and pay child care and everything else. So that feels like another good sign on the on the inflation front. Yeah. Yeah, for sure. Again, it's just a question of speed in my mind. Okay. All right. I am going to play a little bit of the game with you. All right. Hint, this is

inflation. 2.1%. What is 2.1%. That's got to be stripping out some Yeah. Ories. Maybe if you strip out, oh, if you strip out shelter. Yeah, very good.

Just shelter. Oh, just shelter. Oh, okay. Shelter. Take CPI, strip out the shelter component, right? Yeah. Over here, we're at 2.1%. 2.1.

And that's two thirds of the CPI index. One third is shelter. Two thirds is everything else. Two thirds is at 2.1%. Right? We know shelter costs are going to moderate. But again, you're throwing in the energy in there. But, okay.

But I'm just saying. Take that out as well. But, but, but I mean, the shelter component we know is headed south, right? The rate of inflation is head south. It is. It is. 2.1 on the rest of it. So I, you know, it just feels like inflation's moving more definitively in the right direction here.

Yeah, you're right. Core CPI was stubbornly high, but that goes back to vehicle prices and shelter. And that's, that is definitely going to roll over. So I don't. I don't know. I look at that, of course, as you say, you see what you want to see, but I see a pretty positive inflation number. So you take out food and shelter. Yeah. Down to 1% mark.

Okay. You know, see what you want to see. You're speaking my language. You're speaking of my language. All right. Okay. So that then brings us up to the Fed in monetary policy. and you want to give folks a sense of what happened and how you interpret things?

Yeah, so they paused kind of what we expected. So they did not change the Fed Funds rate. The dot plots, which are the projections of the members of the FOMC, did change quite a bit. So the expectations have come in a bit in terms of, well, I guess no. In terms of future hikes, they actually went. up, right? The members are expecting one, two, probably two hikes additionally. Quarter point each. Quarter point each, yep. And then, of course, there's the most important part of this is the jawboning, the actual comments of Chairman Powell.

My interpretation is kind of did what he had to do in terms of saying we're going to pause now, but leaving the door open, sending a signal that they remain ready to hike as needed. perhaps to try to calm the market. So that's really the psychological battle that we're in right now with the markets, trying to get them in line with the Fed. So I think my assessment overall was a good meeting. I don't think he blew it in any sense in terms of the commentary, which has been the case in a couple of these meetings over the last year. So they're still in a hard place, though, right?

Or a difficult place because inflation is coming. in, but it's still quite high. Yeah, I was surprised to see the forecast, the dot plots, as you say, now indicating the kind of the consensus of the folks on the FMC, the policymaking committee of the Fed, thinks there's now going to be two rate hikes this year. So we're on the fund rate target. We're a little over five. That would suggest we go to five and a half to five and three quarters.

And, you know, that doesn't, that wouldn't have been me. I would have said, you know, we've seen all the rate hikes we need to see because inflation's coming in. And we know it's coming in with a pretty significant degree of confidence. Labor market's easing. Another data point we got this week, 262,000 initial claims for unemployment insurance. That's the second week in a row. 262 is kind of sort of, you don't want to see it go much higher than that, right?

I mean, that means layoffs are now, if we're around that, if that's the actual level of UI claims, you know, it's the folks saying, hey, I'm unemployed, you know, help me out and cut me a check. That's pretty close to, you know, where you layoffs are, you know, in a reasonably good economy. You don't want any much more, much weaker than that. And job growth, you know, it's been strong, but we just got data based on unemployment insurance records, the so-called QCEW data quarterly census of employment and wages, which is what the employment data, the survey data that we look at every month will be so-called benchmark to because that's a full count of employment. And that shows weakness.

And to me, that indicates we're going to see, and it's hard to draw direct line from that QCEW to what the revisions are ultimately going to be. But it feels like we're going to get some downward revisions in these employment gains. So we're not creating 25,300,000 jobs a month. We may be creating 150K or 100, 200K, something like that. So it feels like everything is coming into place with a funds rate target of five and five and a quarter percent. And by the way, hey, everybody, I don't know that this banking crisis is over, right? I mean, the next shoot of fall is on terms of credit quality.

We're going to start seeing losses on loans made to commercial relations. estate to businesses to consumers, and that's going to start to put pressure on the banking system as well. And we don't know how that's going to all play out in terms of, you know, depositors thinking and deposit runs and so forth and so on. So you had that all up to me. I go, what, why two more rate hikes? That makes just, you know, that's not my, that wouldn't be my forecast. I think it, I think it goes to communication. Is that what it is? I don't know that this is. I don't know that this is there. Okay. In their heart. Part of heart. Yeah. I guess this is they're trying to send a message that they're not waffling here, that they're ready to

go. If inflation should take it, maybe these energy, you know, declines that we've seen turn around. Maybe there's another shock here. They're ready to act. I think that's what they're fighting against because there's this narrative out there that they're going to be weak. They're going to to cave, right? They're pausing now, and they'll allow a possibility of a stackflation scenario to develop here. So that's how I interpreted, that the dot plots are really about sending a message. Yeah, you know what? That makes sense to me. And I think markets interpreted it that way, too, right? Because the stock market initially fell when they saw the dot plot. And then by the end of the day was back in the green. And then yesterday, Thursday, June 15th, we had four or five

500 points on the Dow up, green, lots of green. So it feels like markets are kind of where you are. They don't believe it. They don't believe it. They don't believe two more right hikes. Yeah, I think that's right. Yeah. Okay.

So you talked about the CMBS. Did you catch the, or you talked about commercial. Oh, yeah. There was the commercial mortgage back securities delinquency rate report came out this week, and that showed pretty significant increase, right? So we are already starting to see some of that credit deterioration in the CRE markets. Yeah, CNBS, that's the Moody's data based on the commercial mortgage loans that have been securitized. They tracked the delinquency rate on those loans in the securities, the CNBS securities.

That was going to be my game. That was your stat. Yeah. So, you know, let me turn it on you. What was the delinquency rate in the month? Oh, my own sales. He can't go look at your screen. That's not fair.

That's my natural. Four and a half percent. Yeah. Okay. Then right there? To the second significant digit, I should have said. 4.51. But actually, you know, that's up meaningfully in the month, but it's still incredibly low.

It is. It is. Yeah. I mean, if you go back in the teeth of the pandemic, it was seven and a half, eight. And at the teeth of the, in the wake of the financial crisis, it was 10, 10 percent. So it's still, you know, very, very low. Although that delinquency rate, if you look historically, tends to move pretty fast. When things go south, it goes south fast.

That's right. That's right. So this could be the opening salvo, if you will. Yeah, and interestingly, across the board, right? Even apartments got hit. Everything was showing deterioration, right? Industrial held up okay. A little bit better, right?

Hotels okay, surprisingly. Self storage was actually down, I believe. Oh, was it down? Self storage? Okay. But it was really office and retail. It got, in multifamily to some degree, that got hit. at the most, yeah.

Right. Okay. All right. So anything else on the statistic, on the economic data that came out the week or anything else you want to say about the Fed? Here's what the thing about the Fed. Can I say one more thing about the Fed? I ask you the question, but I'm going to answer it.

And I think I've mentioned this before in the podcast, but I just want to say it again, get your thinking, going back to what the Fed's going to do here. You know, my sense is that once inflation is at three, and clearly going to cross a line into the twos, that the Fed's going to relax considerably because in their heart of hearts, if you ask them, you know, what is the appropriate target for inflation? It's not the 2% official number that they have. That was set many moons ago in a different kind of an economy.

It's more like three because, you know, if you're at 2 and, you know, you get a into a scraper or recession, you get to the zero lower bound on the funds rate very quickly, and then you start queuing, and nobody, that's not very effective and no one likes doing that anyway. So, you know, we get to three, why, you know, sacrifice the economy to the altar of two when you don't really even believe it? And then the other thing is got an election coming, which, you know, does the Fed really want to play a role in deciding who's going to be president of the United States, which I presumably, if they push the economy into recession, anytime now going here, going forward, particularly as you move into 2024, you know, that's going to have some

really significant political implications. So what do you think of those arguments in terms of what it means for monetary policy? Well, I think we've noted before. They cannot possibly say three. Any of that. No, yeah, yeah. What they can do and what they've already some sense committed to is say it's a 2% average, right, over the cycle. And before the pandemic, we were below two, right? We were struggling to get a 2% inflation rate. So that gives you a little bit of cover to say, you know, two and a half is fine, right? Because we're averaging out over time here. So I'd agree that they, if they see things coming down, if we're, you know, on the path, glide path towards lower inflation, then they're not going to risk or have that motivation to hike more aggressively

just to get us down to 2% even faster. I'm not sure, though, that they've abandoned 2% as the ultimate. The ultimate goal. Yeah. Because that's so ingrained now that it's... But they come more relaxed about it. I mean, do we have to actually get there by mid-20204? No, no, I don't think so.

I don't think so. But again, it's the path, right? If we're heading at three and it's, we're at three and we're gingerly getting down there. We go 29, 2.9, 2.8, right? It's very slow. I think they're satisfied with that. Do you think they actually cut in that?

No. I think the bar for cutting is high. I think the bar is high. I mean, they do need to get inflation. And I think you're right. They don't want to give up on that target. And they do have some flexibility given the new framework they adopted a couple years ago. So I don't think they'll do that. I don't think they'll cut until we're, you know, at

at least on a week-to-month-to-quarter basis sequentially around that 2% target. On CPI, that's two and a half, by the way, because construction differences in methodology, the methodology constructing these two things. The 2% is the core consumer expenditure inflator, which has different weights and everything compared to the CPI. Yeah, so we're at 3% inflation, but 4.5% unemployment. Yeah, because 4.5% unemployment would suggest that we're probably in recession, right? Yeah, so where we... I mean, then then we start cutting.

Probably. Then they would think, yeah. I don't know. It's close call. Yeah. Yeah. It sounds like your bias now is that they're focusing. They're going to shift gears here and start worrying more about the full employment mandate.

That's a guiding principle with inflation coming if it goes to script, right? Yeah. I mean, if we're sub three and it feels like we're going to two and then you've got it, you're losing jobs and unemployment's starting to rise. I say, okay, they start cutting at that point. But in my baseline, no recession, unemployment kind of meanders higher, kind of goes to four-ish, something like that. No.

I don't think they cut until we're at, you know, within spitting distance. of two and a half on the CPI. And in my outlook, that, that, you know, that's probably right around the election day, you know, so they may wait until after that, you know, so again, because they don't want to get, you know, involved in that kind of, you know, debate, discussion. They don't want to be part of that conversation. So maybe December of next year, that's, by the way, we have the first cut in March in our, in our baseline forecast.

And I'm kind of thinking maybe that's too soon, too soon, you know, maybe they wait a little longer than that. Okay, let's end this part of the conversation again with recession probability. So what's the probability of recession in your mind for starting at some point in the next year between now June of 2023 through June of 2024? And this is NBER defined official rest of job loss. We're losing jobs, you know, unemployment's moving north of four headed towards five, you know, that kind of thing. Forty, 40, 45 percent. Oh, really? Okay. That's a little lower. No? That's a little. Well, I think it was at 40% by the end of the year.

Yeah. And then you were two thirds for next year. Yeah. Okay. I guess to make it consistent, it should be closer to 50%. Right. Is it, but is that how you feel? I mean, you don't need to be consistent for me. You can tell me how you feel like right now. No, I'm still feeling that. I sense a breakthrough here. No, I'm seeing 23. The narrative hasn't changed that much. It's still 20. In 2020, I don't see it from an official, even if we're starting to lose jobs, it's going to take a while for the MBR to declare recession. But still two thirds for next year.

Two thirds for next year? I would say so. Really? It's really that second quarter, second and third quarter. Second and third quarter of 24, that I would say, the recession odds are. Oh, you pushed this out. You just pushed it out. Your recession.

A little bit. It's the MBR definition. You just push it out a couple quarters. You were end of this year early next. No? That was like two quarters ago. Oh. Has it happened yet.

You got to push it out. I'm going to remind you. We had a similar kind of conversation back, you know, six months ago. And we were debating whether recession and I kept saying, okay, recession, but when and why, that's a very difficult thing to do, a very difficult thing. As we are now learning, you know, very difficult to do. But anyway, okay, I'm still, I'm growing more optimistic. I'm telling you. I'm going to say 40% probability between now and mid-next year, next year.

But, you know, I kind of want to say one-third, but I'm not going to say it yet. I'm being strategic with this. All right. 40% with an arrow down. Yeah, 40% with a narrow down. I'm feeling better. And so is the stock market, boy, that stock market's really, of course, it's narrow, very narrow, But please tell me you're not using the stock market to predict recession.

No, I'm not. But tell me you're not looking at it. And it colors your view, you know, come on. And the yield curve, just, you know, forget about it. Better track record, highly inverted. Well, no, no, it's right. But take the stock market and add in the corporate bond market, my friend. And then compare that to the yield curve.

Which would you take? Stock market, corporate bond market over here saying no recession, not even close yield curve over here saying recession, which one would you pay? I got to go with the yield curve. Track record. Come on. Okay. All right. I think we're going to call it this part of the podcast quits, but stick with us. We are now going to bring in the Mark Collabria. Thank you so much. Talk to you soon. And it's great to have Mark Calabria here on Inside Economics. Good to see you, Mark. Good to see you, Mark. I really appreciate you coming on. You've had an illustrious career. I think now you're at Cato, right?

Back at the Cato Institute. Yeah. And you were at Cato before being director of the, oh, well, you've got, maybe I should stop, because you have such a wonderful career. Let me, can you just give us a sense of that, you know, your path to where you are today? Sure, you know, and I think it interesting, from my perspective, it really, you know, even goes back to grad school. So, you know, I finished undergrad in the early 90s. And, you know, when we perhaps first started using that term jobless recovery in the aftermath of the savings of loan crisis.

And, you know, one of the reasons I went and got a PhD economics because the job market was so bad at the time. So it's, which is one of those things that has always kept with me. But after finishing my PhDs started a national session of home builders. And you got your PhD at George Mason, right? Correct. Yeah, got it. It did my PhD, George Mason. I know really first time I was exposed, I think, in my public finance class, I wrote a paper on Fannie and Freddie is, you know, off budget funding, funding mechanisms.

And interestingly enough, Mark Palin, who's the current deputy chief economist there at Fannie was in the class with me. So, you know. Who is a better student? Do you remember? Probably Mark. I'll give him, you know. But who's gone on to obviously much greater things. So all that said, you know, had an opportunity to really kind of learn the housing industry.

You know, I was really more an industrial organization market structure guy in grad school. You know, actually, you know, an interview with Carl Shapiro for a job at DOJ, things like, is that that I thought I was going to go in. I trust route, which again, I should say to decide, I think does explain a lot of my approach to mortgage finance really is kind of an industrial organization approach rather than. It's a macro or housing approach. But again, started working at the home builders and got to know, you know, people that, you know, people you know Dave Siders, Stan Dubinness, a lot of that crowd. Dave Crow was probably really my first big mentor coming out of college. So really learned the housing market from those guys. I do not miss spending eight hours a day deep parking cess programs and things like that.

So I'm glad that those days. behind me. Well, now you have chat GPT. Maybe. Yeah, it's true. Or even better at FHFA. It had other people to do it for me. There you go. Even better. But I unfortunately knew enough about it to judge what I was getting. When I was at the homeboaters, I got to know folks at the Harvard Joint Center and they invited me up for a year. Eric Balski, Kermit Baker, really got to know those guys pretty well and worked primarily on the remodeling futures project that Kermit runs. I think he just retired.

Yeah, he did. He did great, just great guy. He learned a tremendous amount from Kermit. And, you know, also got to know Bill Apgar and Nick Racinez during that time. So it really was, and interesting enough, when I was at the Joint Center was when Nick and Bill switched jobs at FHA. And it really was one of the first times I ever ever thought about potentially public service for myself, just, you know, seeing their involvement in government during the Clinton years, went on to the. Realtors, after that, NAR spent three years there, overlapped with my good friend, Lawrence Ewing, who's still there now.

And then out of the blue one day, got a phone call from the Senate banking committee, then under Phil Graham, and the, you know, it happened to be, I should say, one of the members of my dissertation committee happened to be previously the chair at Texas A&M when Graham was there and was friendly with Graham. So it was really just like, hey, anybody know what a conference? of those two knows anything about mortgage housing markets. So again, really call came out of the blue, really went up there, had a great opportunity for good or bad perspective. I guess Graham had decided he was going to retire not long after that. So I spent a year at HUD with Secretary Martinez running

primarily the RESPA office, Real Estate Sotom Procedures Act. I also ran the Manufactured Housing Program was the one who created the Consensus Committee there. Anybody wants to know more about manufactured housing than I ever wanted to. Went back to the Hill six years with Senator Shelby, where again, you know, the topics I worked on flood insurance. So for instance, I'm not sure I like to publicly take too much credit for it, but I'm the father of the mandatory deductible in the flood insurance program. I got that.

That's right. That's you. Probably get some hate mail from that. But, you know, worked on our Katrina response, worked on hero, you know, housing economic a recovery response and was the primary drafter. So going to FHFA was something special for me because I really was part of the team that created the agency legislatively and really had a lot of attachment to it from wanting it to be a success.

I mean, I spent five years in my life trying to bring it, trying to birth it, if you will, in terms of the Hill. And then after, you know, I was a bit worn out after 2008 in the process. And we'd really started the Capitol. Hill started to really get far more partisan. So quite frankly, I just done with it. I just could not go in anymore and deal with it. So I had an opportunity, friends I knew at the Cato Institute, spent several years there,

helped set up their center for financial monetary alternatives, help recruit my friend, George Selgin to help us do monetary, you know, really tried to put Cato, you know, on the map in terms of financial reg and monetary. And then out of the blue, I think first week. of December 2016, a friend of mine calls me and asks me if I'm interested in being Mike Pence's chief economist. I had known Pence a little bit, but not well. So I've spent two years at the White House, 80% of my time was taxes and trade. So worked on Tax at Jobs Act. I worked on USMCA. I worked on our Japan economic dialogue. I have some small responsibility in getting the

Japanese to buy more Idaho potatoes. There you go. I've got you. Contribution to trade policy. And then again, financial services, you know, manufacturing everything, a thing across the board. I would describe the job as 80% the role of NEC for the vice president and maybe 20% CEA.

I mean, we didn't do a separate forecast, but, you know, we really were policymaking. And it was great. My, you know, good friend Kevin Hassett and the team, you know, they, they, they, they, They provided tons of support for anything we ever wanted to do. Because he's had a CEA at the time. Yeah, Kevin was the chair at the time and really let us know, let me know that the staff would do any work I needed. And it really was a great resource and they were a great team for me to work with. So as you know, at that time, FHFA was an independent regulator.

So you had former North Carolina Congressman Mel Watt was still the director for two years in. I talked a little bit of book about the process that got me there. And there were actually a number of other candidates for the job as in addition to myself. I think simply because many people got to know me and the vice president felt strongly about my nomination coupled with the again, having worked on creating the agency was that, you know, I came out of the process and feel very lucky to have had the vice president. And of course, Senator Shelby's and other support and, uh, confirmed by the Senate in April 2019, almost two and a half years at FHFA, you know,

reminder just about 11 months there before COVID hit, which sort of took over much of the agenda, which is probably true for many of us. Well, we're going to talk about that because the book you just mentioned, Shelter in the Storm, is about your experience as FHFA director during that period of time and a lot to cover there. very amazing career actually. Of course, I've been following you for a long time and admired your career. I didn't, but I didn't realize, you know, the, I didn't know you were at NHB, the HB, the HUB, the Halders or at realtors and, you know, quite a career.

I met Vice President Pence a couple times. One time, very nice man. It's a super nice guy. Yeah. You know, I was at an AEI. That's another think tank function. and he was there speaking, and we were kind of both off in a different part of the resort area, and he just saw me, and I was, of course, a little reticent to go up to shake his hand,

but he came over, and he spent like 15, 20 minutes with me. It was amazing. He really, you know, whatever one may think about is his politics. He's just a super nice guy. Super nice. Down to earth. He's actually got a sense of humor. I didn't come through when I was talking to him.

I'm kidding. No, no, no, I'm not being good. Well, I don't often think it comes through. I say it because I think it's perhaps a surprise to some people. Surprise, yeah. That he actually is pretty engaging in person. I was luck. I had an opportunity to travel a lot with him.

I went to Asia with him in 2017. You know, part of our Japan dialogue and got to do cool things. I went to the DMZ with him. So you get to do fun foreign policy aspects. of it. But we did a tremendous amount of travel for tax reform listening sessions and other things. So I got to spend a lot of time with him. And he truly, my opinion, just super decent guy, super friendly guy. And I should say as an aside because you and I share this. He and Karen and the rest of the family, huge pet people. Love their animals, cats, dogs, bunnies, snakes. They got it all.

Oh, really? Snakes. The son had a boic. I think his son has a boic. I think his son has a boic. also. They probably to keep that separated from the other pets. Yeah, yeah. I'm a dog guy, but I don't know about the snake thing. My wife would lose her mind if there was a snake. I have the same error. Yeah. So I was going to say one other thing. I can't remember what that was before we moved on. Oh, this is it. I was going to ask you a question. He's running for president, right? Yes, he is. Are you going to be involved in that campaign?

Well, I mean, I'll do what I can to help him and we'll see how it evolves. I mean, I think he's really, certainly his actually. economics are much, much closer to mine. So, you know, I think, you know, again, his views are fairly consistent with mine in terms of economic policy. And I think he would put us in a pretty good place in terms of economic policy. So again, I hope he does well. He again, has the right instincts, you know, in my opinion. And, you know, I think an underlying there, I don't think it's an exaggeration to say, you know, second to the first lady, there was probably nobody. that President Trump spoke to more often and more regularly than the vice president.

And they were very engaged in policy. And a lot of the big choices, even personnel. And of course, at the end of the day, in every administration, the president, that's where the buck stops. The president makes choices. But Pence had a tremendous amount of imprint on economic policymaking during those years. And so again, you know, we'll see how it goes. Well, very cool career. And here we are. Now that it's very clear you're a tried and true Hauser, so-called Hauser, you're deep into the housing housing finance system. Let's talk about the housing market right now. What's your sense of things? You know, my sense of things is just like one of the weirdest markets and the time I've been following it. So let's talk to on a couple of

attentions. I mean, while of course, even in the Great Recession, you know, what was going on in California, Arizona, Nevada was not necessarily what was going on in Texas. But today, you know, I can't think of a starkle contrast than say the southeast from the west. And so first of all, the markets just seem to be moving in very different directions. Of course, you know, I think the fundamentals do explain that. You look at migration patterns. You look at where people want to move. You look at warehousing is being built. Certainly it's all explainable. But, you know, I remember for a long time the conversation, particularly in the 90s and 2000s, was sort of state-level economic convergence. And to me, we're seeing a big divergence geographically.

That's one. The other thing that, you know, really is probably... Which is really just to make that concrete for the listener, the western part of the U.S. field, particularly California, kind of a Boise's always been the kind of the poster child down to Phoenix. That part of the country is getting nailed. Absolutely. What West Coast in terms of, you know, housing prices are where the declines are. You still, you know, continued, you know, either out migration or weak migration, weak job growth.

And again, just huge difference between what's going on in California. And, of course, some of the Western markets, it doesn't take a lot of people moving in from California to blow up Boise and it doesn't take a lot of people moving back to deflate it. So a lot of those neighbors of California really got hit. But you're just seeing something very different in Florida, Georgia, Carolina. It's just a very different housing market. And then the other wrinkle, in my opinion, of what's very different is, you know, even though 2008 focused a lot, you know, on the foreclosure crisis and on single family, you know, we had a,

you know, multifamily kind of mirrored what was going on with single family in the 2000s. To me, I think we're seeing a big divergence between multifamily and single family. And of course, part of this is that, and I'm mostly talking on the construction side here, but you're having a big degree to which the tightness in existing home sales, of course, because right lock-in has supported single-family construction in a surprisingly strong way. whereas, you know, I think we're starting to see and have seen real weakness and multifamily. Of course, this depends on geography, too, is I learned at NAR, location, location, location. And they really do differ.

So not only have we seen pretty big geographic differences, we're seeing pretty big differences, in terms of market segmentation in my view. And I think it makes it very hard. You continue to see these things going in different directions. I think normally in the kind of pace that we've seen in Fed behavior, you would have expected probably a lot more to break in the housing market that has. So there's certainly been more resiliency in the housing market than I think most of us expected. Perhaps probably were the Fed expected.

Yeah, particularly house prices, right? Yeah. Yeah. By our index, we calculate an index repeat sales. we're down, what, Chris, two, three percentage points from the peak nationwide, something like that. Closer to two now. We actually saw. Yeah.

So again, it's been, I mean, I think it's just been kind of unprecedented to kind of have this degree of tightening with, I mean, certainly not zero response in the housing market, but a lot less of a response than one would have expected. You know, I'm still, you know, I mean, if you ask me where I, where am I today compared to where I was a year ago, I'm probably more optimistic on the single family side than I was a year ago. But equally, if not, maybe more pessimistic on the multifamily side. But, you know, to me, a lot of it does come down to the job market. And, you know, we clearly have had, you know, since the middle of 2020, you know, the people forget. the recovery from COVID job-wise was just been stunning. So to me, the bottom line and takeaway for the housing market is what does the job market continue to do? Because I do think, you know, this is, if you want to get into this conversation, I'm a little bit more on the pessimistic end of the spectrum in terms of what underwriting standards have been.

And to say that I think that mortgage performance and housing performance is much more tightly related to the job market than it has historically. then in my opinion. And so, of course, the pluses is that as long as we continue to see job growth, the housing market will do fine. If, in my opinion, we see significant job loss, then I think we're going to have trouble in particular segments of the mortgage market and the housing market. I don't think it's going to be systemic by any stretch of the imagination, but they're going to be pockets of distress if we see distress in the job market. So do you have a view on the direction of house prices here or where they're going to go? I mean, we, we, our view has been, although I say this with less confidence, is that prices will still move south here, maybe not as much as we thought a year ago, but still kind of high single digit, you know, peak to drop decline, only because without that given where mortgage rates seem like they're going to settle and given the state of the labor market and the incomes, to restore any kind of semblance of affordability in a single family market to get home sales back up to anything that's consistent with long run historical norms, you do need.

to see some weakening in price. And it's going to take some time because you got, as you said, that lock-in effect. Yeah. And we have to wait for life events for people to have to move to actually transact and for prices to come in. But that's kind of our sense of things. Is that consistent with your view? And maybe I differ a little bit in magnitude, but qualitatively, absolutely.

I just, you know, to me fundamentally, where prices are at, where incomes are at in most markets just dictates to me. I mean, sure, I would love to see a boost in income that closes that gap, but I think that's unlikely. So, you know, in A, I do think there's a bit of a composition effect here, you know, in that what is being sold, I think is different than what we may see in a normal market and certainly the, you know, heavier percent of new sales, but back to the income point. And I do think that, you know, a wild card will be once we start to resume student debt payments. I mean, how much stress is that going to put on payments and affordability? And I'm of the view that, you know, we should have resumed it a long time ago, but here we are.

And that doesn't mean it won't have some drag or negative impact on the housing market. So I think the thing to really watch is what happens when student loan payments resume. You know, do we start to see stress there? You know, so again, I'm, I am in that where I think probably lower single digits, but some of this also does, depend on what inflation continues to do. In mortgage rates, I guess, right? Absolutely. I'm probably a little bit more, I'm more on the end of seeing mortgage rates probably

normalize around the high fives and the six before. And I think others may see it perhaps as much as a percentage point lower. So, you know, again, if we think that the, you know, say 10-year treasury is going to normalize around four than to me, I think seeing a spread of around 200 basis points, which admittedly is historically high, but a lot lower than where we are today is kind of where I expect the range to normalize. So I think if we can get to a point where both potential home buyers and mortgage investors, except that we're not going back to 4% mortgages, certainly not 3%. I think you'll see the market.

kind of pick up. So the way I, you know, my finance guy aspect is say, I think there's just a really big, really bid, a large bid ass spread in the market. And once things start to stabilize, I think transactions can pick up again. Yeah, I just noticed some fixed mortgage rates are back up close to 7%. It's crazy. Yeah. Some of it, you know, a large chunk of it, in my opinion, is just the repayment risk. I mean, any problem to some degrees, you know, if a lot of mortgage, you know, if a lot of mortgage investors think they're going to make a 7% mortgage and it's kind of, you know, they're going to get paid back 4% money in two years. Yeah. I think if we can get to a point where it stabilizes, say around six and everybody

starts to consensus gets around that, then I think the prepayment problem is lessen a great degree. Yeah, yeah. Okay. Yeah, I, you know, my sense is that if you're close to seven, then we'll get price declines. If you're closer to six, then maybe things stabilize. That's kind of sort of how it feels, you know, feels out there. Amazing how sensitive, I guess makes sense with how house prices are. You mix in even a point on a mortgage rate. Makes a huge difference. That's a big difference. That makes a big difference. Hey, Chris, before we move on, let me turn it to you. Anything you want to ask, Mark, about the state of the housing market or did I miss anything? No, I think you got it right. I think we're not too far apart in terms of the, yeah.

It sounds like we're pretty similar. Oh, I did want to ask, Mark, you kind of alluded to this in quick passing underwriting. And just as a preface, for sake of disclosure, I'm on the board of directors of MGIC and mortgage insurer and I'm in the head of the risk committee. So I look at credit quality pretty carefully. But you seem to suggest that. Let me parse that out really quickly where I think I may be, you know, an outlier. I mean, first of all, I do get a little frustrated when people point to medians or averages because even in 2008, the median loan did fine. So I'm not, you know, the medium's got to do fine next time. So, you know, and of course, we don't, you know, we don't all share the same pool of equity. So, and of course, the overall

system was never negative equity even 2008. So I feel, I don't, I recognize sometimes you point to the data you have. So, and I would actually say one of the really biggest surprises to me, when I took over at FHFA was how large of the portfolio for Fannie and Freddie is rock solid. So, you know, there's a big chunk of it that will perform in almost any circumstance. But there's also, in my opinion, probably a 5 to 10 percent terror risk. Most of that terror risk, in my opinion, is actually not in Fannie and Freddie. It's an FHA. And a couple of metrics I'm worried about.

One, I think that there has been significant. what I call FICO inflation. And I would compare to say 2005, I think the typical FICO score is probably about 25 points higher than it would be pre-2005. Part of that is the post, well, part of it even goes back to before 2005, the 2003 fair accurate credit transaction act, I happen to be on the banking committee when we did, but even the post-2008 CFPB changes. So A, regulatory changes. And then coupled with the declining reporting activity for negative events that went on during COVID really kind of leads me. And again, it's hard to quantify, but my back of the envelope is 20, 30 points of FICO inflation have occurred. And I think most of that has actually been at the bottom. People who are

850 were going to be an 850 otherwise. So I think FICO's are inflated. I do worry that DTIs are very high. Debt to income. Yes. Debt to income. And, you know, what we saw internally was the number one predictor of who took COVID forbearance in the fanning of Freddie book was debt to income. And so I do worry that if you get job loss, this is why I get back to a long point. A lot of this rides on the job market. And if the job market remains okay, we'll be okay.

But if the job market stumbles, I think you've got a sliver of high DTI, low FICO, high LTV borrowers who will have trouble. And that worries me. And I think it will be more significant than is commonly recognized. Yeah, that's consistent with our, you know, our, Chris has written a lot about the score inflation, which is actually shown up in the credit card and unsecure personal lending, you know, already you can see high delinquency. And I think, go ahead. I was going to say, I'm glad because, you know, I mean, you know, my takeaway, too, is from, A, having looked at kind of the factors, but talk to a dozen or so people in the industry. And nobody really seems to want to go on the record.

So I'm glad you guys. Oh, yeah. And you can already see it in the FHA book, right? You can feel delinquencies are already rising pretty quickly. And that's at a 3.7% unemployment rate. Yeah. And I do worry. I mean, they haven't said how they're going to report this.

But as you know, there's a proposal, you know, to have a partial payment where they would essentially take money out of the fund to make borrowers current again without actually the bar of themselves having paid. I didn't hear that. I mean, it's not quite being finalized yet. And of course, it's supposed to be similar to the payment deferral option that we created FHFA, but it's not clear how it would be reported. And, you know, for good or bad, I mean, at least in terms of an information, FHA delinquencies

are, to me, the canary in the coal mine. They'll go bad before anything else in the mortgage market does. And I do worry that we may be seeing kind of a lessening information value of FHAA FHA delinquencies. But again, if they report to us how many of these partial claims they're doing, then we should be able to back end the numbers out. But it's just not clear yet. So we've talked about the present.

I want to now go to the past in your book, Shelter and the Storm. And I'm not sure we're going to get to the future, Mark, which is also really kind of critical. So we will eventually, right? Yeah, yeah, yeah. Yeah, but I'm going to just get this out there right away and get you on the record says saying yes. I want you back. I'm happy to come back and talk about what tomorrow may hold.

Okay, because there's a mortgage, mortgage finance policy. A lot of stuff to talk about Fannie, Freddie, conservatorship, federal home loan bank system. I just wrote a paper that. I've heard. Jim Jim. Jim Parrott, yep, at Urban. But let's talk about the past in the COVID experience. And in the book he wrote, and let me say, as I told you before we signed on, I thought the book was very well written and enjoyed it very much. I did notice my name.

I was mentioned once in the book. And I felt pretty good about the forecast. I still do. But that's okay. It's beside the point. We don't know. Yeah. But I think maybe, I'm not sure exactly where you'd want to begin.

But I thought the, and you said that the book is, to some degree, addressing some of your pet peeves around what happened during that period. I mean, I was just going to say the one thing that kind of top of the list, I think, tell me if I'm wrong, is around the criticism you received around helping the mortgage servicers. Is that correct? I mean, that, you know, it certainly was something where it was probably most in my mind

when I started writing it. I mean, first of all, the top level message of the book, you know, It was mentioned in the beginning. I was on the banking committee in 2008. I had very strong feelings and, you know, I did mortgage oversight about how, you know, programs like HAMP and HARP were functioned and where I felt they fell short. And so kind of the biggest theme of the book is, you know,

here's the things that I really didn't like about the 2008 response. And, you know, if by chance I would be in a position to do something about them and as fate would have it, I was, why we did it differently this time and why I think that was a success. And then to kind of raise the question of, you know, what did we do that made sense solely because it was a pandemic that may or may not make sense in the future? Because we will have recessions again, even if we don't have pandemics, let's hope not. And then what are the things that should stay and to kind of have that conversation and also to kind of go through the why? You know, one of the things that's been very interesting is a number of particularly industry people have read the book and said to me, now I know why you did that. Of course, I had hoped to have been fairly transparent at the time, but, you know, I do think it's a good precedent for policymakers coming out of government to explain, you know, their actions a little more in depth and why they made certain choices.

And that's the biggest thing. It's like, these are all choices that were made. And I want to help people understand why we chose a right. rather than be. Certainly, you know, I don't know, fun is the right word, but one of the more, one of the more interesting parts of writing that was going back and reading some of the, you know, very gracious things that were said about me in the press. Yeah. I mean, I didn't, by the way, I didn't, I wasn't one of those guys.

And you're not. You know, you know, I always respected that, you know, even when you, I disagree, I've never thought you've made it personal. So, you know, and I don't really felt like you've ever in. And certainly, I apologize if you feel like that I've ever questions your... Mark, you're too nice a guy. I mean, how can, I mean, come on. It's impossible.

And it's to me, you know, I think we're both, I mean, you and I, you know, may well, and this could be another episode, have very different models of how the economy works and maybe different assumptions. But, you know, I think we're both trying to get through, you know, how does the world actually work, you know, how we're trying to get to the end of this. We're trying to understand what works. And to me, when people kind of engage in at homin, and personal attacks. It's really just more an indication of the weakness. The reason that I

repeat some of that stuff in the book is I want people to understand, you know, especially now it's timely with, with, you know, SVB, First Republic, all these things that, you know, I've been in the seat where 99% of the phone calls and pressure you get is rescue, rescue, rescue. And I wanted people to understand that that's what you get. That is the pressure. That is the situation. There's almost nobody who calls and tells you, well, maybe, you know, maybe we should sit, you know, go slow and think this through. That's not, that's not, that's not how it ever goes. And so one of the more frustrating aspects, because we were rather generous and I, and I do talk about how we set up the programs and probably the biggest change was really to let borrowers,

you know, simply state their distress. you know, as I called the honor system. Because to me, one of the real problems in 2008 was the paperwork shuffle that, you know, we took borrowers months and months to get in. You know, some borrowers, some lenders submitted fraudulent, some stuff got lost. So I looked at this and said, you know, we're in the midst of a pandemic. We can't afford to set up a program that takes borrowers five months to get in. That's not an option.

That option is off the table. And because we also did means test it, which I think is actually. an important aspect of it. We made it easy to get in. Now, these programs are set up weeks before the CARES Act, and our intent had always been to get you in and then call you three months later and verify in, you know, it wasn't going to be you're in and that's it. It was going to be get in and we're going to do the verification on the back end, not the front end. And just quickly, the CARES Act was the first piece of COVID relief legislation passed under President Trump in March of 2020. I think it was $2 trillion.

something like that. Yeah, yeah. Two trillion deficit financed. And it's probably, the support was five trillion all in. Yeah, we spent a lot. We spent a lot. But this was two trillion. And there's a lot of other things going on.

And I think that was also the big, the PPP was probably the biggest component of that. Five, six hundred billion of that was PPP. But that was for the small business. Exactly. Exactly. And so the CARES Act also codified a lot of what we had already set up. And I talk about the pros and cons of putting conification. So because we.

were we were essentially invoking the honor system, which of course, I try to be candid in the book about what were gambols, what were the uncertainties. And so there was a tremendous amount of debate about, well, if you make this easy to get in, everybody will take it. And that certainly was a possibility. We thought, however, we economists would say, we would make an incentive compatible. We would make it easy to get in, but A, we would be stingy. We weren't forgiving. I mean, It's easy to forget that there were broad calls for mortgage forgiveness, rent forgiveness. I mean, of course, I had no money to do that even if I wanted to. But A, we were going to make it very clear that it's easy to get in, but you were going to pay everything back.

And then we created some carrots. So for instance, normally if you take some sort of mitigation forbearance and Fannie and Freddie, you have to make 12 on-time payments before you could refite. So we created big carrots. We said, you know, if you were always paid throughout your form. You can immediately refi upon exit of the program. And then if you had missed payments, all you need to do is make three on-time payments to be able to refi. So again, we created some stakes.

We created some carrots to try to, like, you know, modify how generous we were on the front end. But because of the generosity in the front end, there was a lot of concern that, you know, the mortgage servicing community. So just the non-banks, I guess I should emphasize, would come under stress and fail. Can I stop you just very quickly? just to bring the listener up to speed. So the mortgage market currently, I think 75, 80 percent of all mortgage loans that are being originated, and that I think it was roughly the same back in the pandemic, are made by so-called non-banks. These aren't your traditional bank. These are independent mortgage bankers. And these institutions are generally smaller. There are some big guys, but there are a lot of smaller ones. And the concern was at the time that because of the foreclosure, mitigation efforts, these servicers that are servicing the loans, these mortgage banks, had to continue to provide a payment to the investor. So they were shelling out cash, but they weren't getting mortgage payments from the borrower. Therefore, they're stuck in a

hard place. And therefore, now I'll turn it back to you. Yeah. And much of the concern, I should say, the book kind of walks through, you know, quickly how we got to this. And again, and point to emphasis, we have a very, very different mortgage market today at 2020 than we did pre-2008. And while some of these non-banks are large in terms of volume, they all tend to be rather small in terms of balance sheet. And so the real question was, you know, their cash, because again, there are a significant number of depositories who do servicing.

But A, as we remember, remember massive amount of inflows and deposits that weren't the same sort liquidity concerns, they had a balance sheet. So it really was kind of limited. And so to me, if I can kind of put this into three variables that I think were, some were known, some were not known, or at least some were known to us and not known to the rest of the public. So whether there's got to be stress, and of course the question of whether stress would be systemic or would be a small number of institutions, first of all, was, you know, what are actual take-up rates going to be? And we had put together, a say as an aside, perhaps one of the most shocking things to me about FHFA when I started in April 2019 was there was no forecast function. There was no housing price forecast function, no housing market, no macro forecast function.

And so I hired Lynn Fisher. They got that from us, Mark. Well, they got it for Fannie and Freddie. You might have got it from you. No, no, I'm joking. The view is not that you don't look at what other parties say, but you also have your own internal view. So I had hired Lynn Fisher to set that up, and we were fortunate that that new division of research statistics opened its doors in January 2020. So by the time COVID had hit, we'd gotten that staffed, and we had a pretty good model based on previous recessions, what we thought forbearances would be for the Fannie and Freddie book, given where we thought stress in the mortgage.

market would be in the labor market and given the quality of the book. And my opinion, it turned out to be quite accurate. In March, I think I was on TV with Diane Oleg and kind of asked me where were you going to be. And I said, Dan, I think we're going to be around in the Fannie and Freddie book, around 6% in middle of Bay. And lo and behold, we peaked around 6.7 in the Fianney and Freddie book. Of course, FHA and others were worse. But so, A, we had a pretty good forecast model. Now, again. Just one more, just to catch people up because you know this. I know this.

Chris knows. That's fair. Yeah. We're moving fast. So we're talking about the mortgage, the mortgage banks, the mortgage servicers. And the question is how big a problem, this cash problem do they have? Exactly. And you're saying, okay, first thing to consider is, well, how many people are actually

going to take up the forbearance, the mitigation, because that's going to determine the size of the problem. And therefore, that's what you're talking about. Absolutely. So first variable is what's uptake among borrowers. That's that's the first variable. And that was probably where there was the widest range. And again, you know, we had, I think even our 95% confidence interval suggested it wasn't going to get above 15, 20% worst case.

But that's the first variable. And that was where I would say most of the public debate was the next two variables. There was less public debate largely because. we had information that others did not. And so second variable is who actually bears the burden. And so for instance, I mentioned earlier, there are significant number of depositories that are servicers, but I think less recognized is that about 40% of the servicing responsibilities for the Fannie and Freddie book rest with Fannie and Freddie. So for instance, and you know, if you go to the cash window and settle a loan, Fannie and Freddie take over the advanced responsibility.

There are contracts who you can choose as a servicer to essentially buy insurance from Fannie and Freddie on the servicing front. So all this said, only about a fourth of Fannie and Freddie servicing advances were the burden of non-banks. So a lot of people would scope out, here's the market, here's how bad it could get. And of course, pre-COVID Fianian Freddie limited non-bank services to four months obligation. lot. We were in the process of aligning that. So the second variable is how much are, you know, how much of A, the take up is the responsibility of B, the non-banks. And, you know, we started sharing that information. And it's understandable. I, you know, probably one of the hardest things I had to go back and forth describing the book was exactly how remittance schedules work for service. I read that.

I thought it was well written. Well, thank you. Because I didn't, you know, it's not necessarily the most transparent issue, and it really was an extremely important part of the issue. And then the last variable was how much resources to the non-banks have. And so we had at the time COVID hit, I think there were 346 non-bank servicers that Fannie and Freddie did business with. We had income statements, balance sheets. We immediately got on the phone with the largest 30. And service industry is rather concentrated. So the largest 30 got us probably 90% in the market. And we immediately, said to them, you know, I've got your financials. Is this up to date? What has changed? And then we lastly also, you know, while on those phone calls, not only did we ask, what is your current status,

we also asked, what is your capacity to absorb servicing from others? So we had an internal metric of this is how much servicing we could transfer before, you know, before there was really any risk to stress. And so again, I think the public debate was over the first variable. We tried to get both the capacity for the industry and the burden of the industry. I made public in a June 2020 testimony. And we had tried to get some of that data out earlier in sharing it to try to have a sense of people, how good or bad this was going to be. And then, you know, we tried to work with the industry to get there. First of all, as I've said once before, the situation at FHA and Jenny was far worse. And in fact, most of our concern for Fianney and Freddie servicers was not

the service center of their Fianney and Freddie book. It was for those servicers who also did Ginny, that there might have been, you know, kind of a knockoff effect. And so for us, we just never, you know, maybe at any one time, there were a small number of servicers. And while I don't name names, you can probably do a little Googling if you get the descriptions of book, there were two large servicers who had private equity parents. And I'm actually not in the current vogue of being anti-private equity by and large. I think it serves a useful function, even if it's got some flaws. But these two private equity owners and these two servicers had taken out literally billions out of these companies in 2019. And of course, investors take money out of companies. There's nothing

necessary nefarious about that. But when these companies had come to us and wanted Fianney-A-Fraid to provide them funding, we reminded them, you guys just took a lot of money out of these companies. companies. And if you get into trouble, we'll transfer the service and someone else. So if you would like to maintain the value of those platforms, you might want to put money back in. And then once they figured out that we were serious, they put money back in. And those platforms are around today, deserving, performing value. And a theme of the book really is this kind of, you know, argument, debate about, you know, what should be the threshold of response to providing assistance. And And, you know, not to sound like a lawyer, but, you know, my approach is it's a rebuttable presumption

against assistance from where I sit, but it can be rebutted. You can provide enough data and evidence. And we were very clear throughout that time that show us the data you're looking at. Tell us what you see that suggests this is necessary, which is very different than I think kind of the conventional view of, you know, when in doubt, bail it out. And that's a really important broader point you try to, to, to, to tease out, you're saying, hey, look, you know, generally when we get into a scrape, a crisis, the immediate reaction is for government to come in and backstop. And of course, at times, that's absolutely essential. But in this time, in this particular case around the

mortgage servicers, you're saying, look, I didn't do that. And it turned out okay, no problem. The servicers kind of navigated through, they managed through, and I didn't need to bail them out. But let me ask you a question around that. And this goes to the forecast. I did effectively on the take up. I assumed that policy that we were going to see in response to the crisis was the policy we had that, you know, I didn't count on $5 trillion. Who would have thunk $5 trillion in support? UI and food and student loans and on and on, PPP.

And also the Fed's response was also pretty amazing, zero lower balance. massive QE. In fact, you mentioned the refy boom in your book, well, chapter on it, you know, you saw mortgage rates go from three and a half to four before the pandemic to a record, believe it or not,

two and a half percent. I mean, unbelievable. Insane. Yeah. Just giving money away. And, of course, the economy,

as you said, you know, amazingly turned around. So, you know, to my perspective, one reason why you didn't have to, step in, why the mortgage servicers kind of navigated throws is because they did get bailed out

by everybody else. So it's certainly a reasonable argument to say everybody got, everybody got bailed out. And of course, you know, I suspect that, you know, you and Chris struggle with this on a daily basis, which is kind of teasing out causality from correlation. Now, as I mentioned, you know, we had built a model in early March, our econ team looking at historical performance. And of course, that historical performance embedded. So, you know, we did expand unemployment insurance benefits to the Great Recession. So there are some policy responses that, you know, yes, they weren't as generous as they were this time around. And I mean, I know I'm an outlier to say,

I'm not of the view that we were stingy on the fiscal side in 2008. I'm of the view. We spent a lot of money and we helped a lot of people. We just structured it. You know, I'm more of the Casey Mulligan view that we structured those programs in a way that disincentivized work. But all that said, certainly our forecast incorporated previous policy responses. So we certainly didn't take a baseline of government will do nothing. But we did take a baseline arguably of the response will be similar to perhaps the Great Recession response, which again, in my view, was generous. So all that said, trying to tease this out and say, you know, would it have been worse, how much worse? How much worse. And I could say, you know, our 95% confidence. Just to put a point on that, in the Great

Recession, because we've obviously done a lot of, I've done a lot of working this in a year. The total fiscal response to the great recession was 10% of GDP. I'm rounding, obviously. Yeah. The fiscal response to the pandemic was 25% of GDP. So more, much, much more than would have been what normally expected. And so certainly our modeling efforts that, you know, suggested that we were going to see single digit forbearances. You could say incorporated, say, a 10% fiscal response. And I think it is an open question. I mean, I certainly am a believer that fiscal response does at some point have diminishing marginal utility. So I'm not convinced that 20% is twice as good as 10% in terms of a fiscal response. But all that said, you know, parsing through, you know,

would it have been different? And like I said, the financial data we had, such as, you know, who was going to bear this, what was the uptake. I personally think the probably biggest thing that really drove, and again, you had your forecast, and I guess I could turn the question back to you, with my observation, or rather the internal data we had that only about a quarter of Feeney and Freddie servicing responsibilities was with the non-bank. That's a great point. I'm assuming that had to be new to you.

Oh, that, yeah. Of course, I didn't, I didn't take the next step and say, should, you should provide support to the servicing industry. I didn't take that step. I just did the first step, variable number one, variable A. Which of course is why we created, you know, the forbearance and why we set that up. And so again, and they were, and we, it was very, you know, surprisingly large number. I mean, I think, you know, on one end, I think about 15% of Fannie and Freddie forbearance borrowers took it for a month, you know, and left.

And, you know, probably about a fourth took it for. three months or less and left. So a lot of people took a gut back on their feet. Obviously, there were a lot, you know, I think less than one percent of Fannie and Freddie forbearance had LTVs over 97. So these were generally, and that's part of what went into our modeling effort as well, which is these bars are in pretty solid shape. But, you know, again, it's obviously very hard to parse out, you know, what was the econ, a wide response of the massive amount of stimulus you know, we provided. And of course, how do you parse that out from, you know, just like the arguments over how much of inflation is fiscal versus monetary? You know, that's what you macro guys

try to figure out. Yeah, yeah. That's my favorite debate now. And it's not easy. You know, and so it makes it fun. Hey, I know we're running out of time and I want to respect your time. I do want to ask one more question around the mortgage servicing now looking forward perspective. And that is there's a lot of concern worry. And this was also brought up in the context of Silicon Valley Bank and signature and everything else. That these institutions are financially fragile in the sense of funding. They rely on warehouse lines with J.P. Morgan Chase. I'm just making that up.

And Chase is in a warehouse lender. Yeah. Yeah. This is an example. And they can get into capital markets and raise some debt. and so on, but the funding sources are somewhat tenuous when you get into a risk-off environment. And if they were to get cut off from the funding, and that meant the mortgage market, because they are 75, 80 percent of originations, would be significantly impaired.

That would hurt the housing market significantly, and obviously that would be a pretty significant threat to the economy. In that context, first of all, am I characterizing this correctly? And second role, what should we do about it? Any or anything? Great question. So on one hand, I don't think any one of these institutions is systemic in the sense of that we could not resolve its assets in a way that would have major disruptions to the economy and mortgage market. So, you know, for instance, we had in fall of 2019, diTech with a rather large servicer who went through a bankruptcy court in New York and we tried.

transferred, you know, it's servicing to new res. And we were able, there were bumps, but partly because you had to deal with the court, not because of the process itself. And so Fannie and Freddie have a large history. You know, there's even the ability we can take a failed, or Fannie and Freddie rather, I should stop saying we. Fannie and Freddie can take a failed large servicer, essentially crammed down the balance sheet, turned it into a subservicer without leave without firing any of the employees so you can take all the people that are there and just redo the financial side of the company where of course the current owners are out but you've got all the same infrastructure so and these are things we walk through and that we stress test so all that said

and you know you don't really want a world but that's not the scenario right the scenario isn't one guy or five guys it's like 50 guys a 500 guys get cut off all at once because we're risk off you know big time risk off what happens It certainly is a concern. And again, one of the things we did see was that the bank regulators, particularly the OCC, were very, very hostile to any extensions of further lines of credit during COVID to the non-banks. I mean, and this is what we saw in 2008, and quite frankly, every crisis, you will see regulators kind of circle the wagon of the institutions they regulate. Like, your problems are your problems. My problems are my problems. That's how it will work every time and we're naive if we pretend otherwise. And so, yes, the fact that many of these institutions are extremely reliant on warehouse lines of credits and depositories that can get yanked or not get extended is a real fragility. And part of the reason I wanted to write, I thought it was important to write the book is

there are really numerous weak parts in our mortgage finance system that we should be concerned about. Now, I, of course, you know, I think we should go. go back to more of an originate and hold depository model, not that there's not problems there. Another podcast market. It's always a matter of picking the least bad option here in the mortgage finance system. So I share the concern. You know, I would rather see us try to find a way to get depositories back into this business. And I talk a lot about the non-banks and the fragilities in that sector in the book.

And it is really worrying to me. Again, I don't think the approach should be bailed them all out. I think, you know, because this is what frustrates me with the kind of, you know, when in doubt bail it out. I think you and I both agree that there's some degree of moral hazard created, which results in perhaps greater leverage. And of course, we always say in Washington, well, we'll come in and we'll put regs in the back in and we'll fix all that.

Well, that rarely ever happens in an effective manner as proven by SVB. be another institution. So to me, you know, I take moral hazard very seriously. I am extremely skeptical of having been inside the regulatory process of our actual on-the-ground ability to control it. And so I worry that, you know, one path we could have gone down would have been to provide 13-3 Fed assistance to the non-banks and then created some big regulatory infrastructure around non-banks. and I think it would have left the system actually more vulnerable in the long run, not better. And it would have left us with federal ownership of this issue. And of course, it would have been better for those non-banks.

But, you know, the solution to having regulated depositories out of the mortgage market is not to regulate everybody else out of the mortgage market. The solution is to come up with a better mortgage finance system. And so we can leave it there and say, you know, a big, a big takeaway from the book is we have a lot of problems in our mortgage finance system to some regard, whether it, as you've mentioned, large amounts of assistance that were provided by COVID that allowed us to dodge some bullets. There's a lot that needs to be fixed and a lot that needs to be done. It's certainly a big takeaway from the book. Yeah, it was a great book. I recommend it to everybody. and definitely want to have you back to talk about the future Fannie and Freddie in the federal home loan bank system.

I will say I just got to notice, no joke. It says a tornado is coming and we should go in the basement. I'm not kidding. I don't doubt it. I don't doubt it. So I approve that. You got it too? That's that buzz you just heard.

Maybe we should go to the basement. Let's do some risk management here. Let's do some risk management. Yeah. There's no question about this. So, Mark, we're going to, I think it ended here. Thanks so much for spending time with us and explaining that. And again, I recommend the book to everyone out there, shelter in the storm, from the storm, I should say.

Shelter from the storm. Great, great title. And we'll, I'll talk to you soon. Thanks. Be well. Be safe. Be careful.