Mark Calabria on how to make the housing market healthy again

Mark Calabria, former head of the Federal Housing Finance Agency and author of the new book "Shelter from the Storm" sits down to chat about his tumultuous time in power, what navigating COVID relief for homeowners taught him and what he thinks mortgage lenders can expect in the coming months and an election year amid high rates, sluggish originations and economic uncertainty.

The transcript of the interview follows:

Heidi (00:10):
Welcome everybody. I am Heidi Patalano, editor in chief of National Mortgage News. Thanks again for being here. Joining me today we have Mark Calabria, senior advisor to the Cato Institute, and author of "Shelter from the Storm, How a COVID Mortgage Meltdown Was Averted." So to give you some background, of course, many of you know him already. Mark was the director of the Federal Housing Finance Agency, which regulates and supervises Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. He served from April, 2019 to June, 2021. And prior to that, he was the Chief Economist for Vice President Mike Pence. He also served as a member of the senior staff of the US Senate Committee on Banking, Housing, and Urban Affairs. Welcome, Mark. Thank you so much for being here.



Mark (01:03):
Thank you, Heidi. It's great to be here.



Heidi (01:04):
Yeah, great to have you. So I thought it's very appropriate to have you here in Las Vegas because you are a betting man and you bet well. I think the book really illustrates the choices that you made in the process of COVID and what happened there, and I wanted you to talk about why you decided to write the book and the process for writing it and what you hoped readers would come away with understanding after having read it.



Mark (01:40):
Heidi, it is kind of funny because Vegas may be the right actual place to talk about this. I really wanted to take the lessons at 2008 because everybody for those in the industry remembers how bad all of these post-2008 responses to the crisis were and how it really was unfair to lenders, unfair to borrowers, unfair to the taxpayer. And so if I could hold back just a little bit, I thought the 2008 response was a disaster.



(02:12)



I wanted to make sure that when people looked at the 2020 response, and again, to channel Vegas, they didn't think it was just luck. That we looked at the data, we evaluated the odds, we evaluated the trade-offs. I try to be explicit in the book about, here are the uncertainties we're dealing with, here are the trade-offs we're dealing with, here are the things we have to guess. And again, like a good gambler, if you will. We assessed the odds, we made decisions on different margins. It turned out, in my opinion, completely differently to 2008 and not because of luck, but because the choices we made and why we made them. I thought it was important that for good or bad, as again, anybody who's been in the industry a long time knows, housing is cyclical. We may not, let's hope not have another pandemic, but there'll be another downturn someday. There'll be stress in the market. There'll be delinquencies again. I thought it was important to go through why we made different choices. And again, part of the conversation in the book is, what are the things that are right for a pandemic? What are the things that may not be right for your garden variety recession, if we get one?



Heidi (03:18):
Yeah, well, I think it's a very interesting time to be speaking to you, certainly given the events of the last several months. You have a chapter on servicing ...There are lots of people in the industry saying, servicers need a liquidity measure. They're not going to be able to handle this giving forbearance to all of these folks. And then you rightly bet that they wouldn't actually need to be bailed out.



Mark (03:48):
Well, I'm not going to say that I was quite counting cards, but



(03:57)



It's important to keep in mind. In March, 2020, if I remember the numbers right, 346 non-bank servicers that Fannie and Freddie did business with. I had income statements and balance sheets for every single one of them. And for the top 30, granted, these were filed on a quarterly basis. So for the top 30, we got on the phone immediately said, I'm looking at your financials. You tell me what's changed in the last couple of weeks. So we took a very data-driven approach to say who is right in the line. Every morning for probably about the first five months of the pandemic, I got an updated servicer watch list. Who were we worried about? Who were we not worried about? And we made a number of phone calls. We kept in touch with people. A couple of takeaways: One, we never saw this as being systemic.



(04:54)



We never saw more than a half a dozen who looked like they were going to get in trouble. Now, I recognize for those half a dozen, that's painful. Nobody wants to have their servicing transferred. We get that. We looked at that as a last resort, but we really let the numbers drive it. But there's also two examples that inform perhaps admittedly my minority take, counter-conventional wisdom take on 2008. I often say that the lesson of Lehman Brothers is -- since we just passed the anniversary -- if you lead an institution to think it will be rescued, it will not take the steps to avoid a rescue. As we know from history, there were at least three different offers to buy Lehman. The response was always, well, we're not going to take less than what Bear got. And so you set up a set of expectations. The reason that this is relevant in 2020 was -- I don't name them, but a little bit of Googling and you can tell who I'm talking about -- there were two large servicers in the spring of 2020 whose private equity parents had taken a considerable amount of money out of those platforms. We simply said to them, if you think those platforms have value, it's probably smart for you to put money back into those platforms rather than come to Washington and expect the taxpayer to do it.



(06:14)



I think after a while, they were probably saying to themselves, "Calabria is just crazy enough to transfer our servicing. I think we'll put money back in those platforms." And they did. That to me is how capitalism is supposed to work. You take the upside, I'm all for people taking money out of a profitable endeavor. If you want to keep the value of those assets, you put the money back in. To me, that's the way it should have worked. So I was glad it worked out that way. Obviously we got a lot of criticism about it, but we really looked at the data, and I think this is timely now, back in March of this year where we had Silicon Valley Bank and Signature and First Republic. I wanted people to understand what it's like when 99% of the phone calls you get are, "Come on. Why don't you just turn the spigot on?" I wanted people to understand why we didn't and why we thought that was important to be data-driven. Gosh, we never said no. We always looked at it and said, "what does the data tell us?" Right? So again, like a good gambler, you look at the numbers and you ignore your gut.



Heidi (07:18):
Well, let's talk about the other side of that. So one of your missions, one of the things that you really wanted to do, was get Fannie and Freddie out of conservatorship. They are still in it.



Mark (07:28):
It's unfortunate.



Heidi (07:30):
So I wanted to ask about some of the, maybe not regrets, but some of the issues where you would've done things differently, choices you would've made. Let's hear about the other side of it.



Mark (07:46):
That's a great question. So probably the biggest single mistake was going in thinking I had a five-year term.



Heidi (07:54):
Nope, that didn't work out



Mark (07:56):
Clearly, the Supreme Court decided otherwise. I had come in with a, "here's our five years, here's where we're going to accomplish at these five years. Here's where we're going to be at the end of five years."



(08:10)



Then of course, I'm there for 11 months pandemic hits, which takes over everything else. Certainly in retrospect, had I known A, we were going to have a pandemic and B, that the Supreme Court was going to put me out of a job, yes, would've probably would've prioritized things a bit differently, right? Of course, I might've bet against things and made a lot of money, but you don't have that kind of knowledge at the time. I think we would've tried. We accelerated capital increases at Fannie and Freddie as quickly as we could. I think one of the reasons I wrote the book is that there's a handful of things that I really don't think people truly appreciate as a fact. One of those facts was Fannie and Freddie were this close to failing because of COVID losses. It cost a lot of money to keep those borrowers in their homes. So the forbearance we delivered was not free.



(09:07)



We had to pay for it even. We paid each servicer $500 for every exit out of forbearance. That wasn't free. That was another billion I need to find. And granted, I know we're in a world where people throw around a trillion dollars in Washington, but the ultimate cost for Fannie and Freddie were probably seven to 10 billion. And it's money we didn't have. So it was a very tough choice. So how close Fannie and Freddie came, but the other positive takeaway is we took advantage of the refi boom to essentially re-price most of the Fannie and Freddie book. Today they are in the best cashflow position they probably ever have been in. That's because we took advantage of that, so I do want people to also understand what it's like to be in that seat of responsibility as a regulator.



(09:58)



One of the things that's been very touching and positive for me is the number of people in the industry who've read the book and have said, "Well, Mark, okay. Now I understand why you did what you did." Perhaps I could have explained it better at the time, but you are in the journalism world. At the risk of being immodest, I think we were far more transparent than just about anybody else compared to the Federal Reserve or compared to FDIC. I thought we were extremely straightforward about what we were doing. Granted, I know the bar is low when you're talking about regulators being transparent, but I think we did surpass that bar. One of the questions of what would I have done differently, even though I spent a lot of time in the book talking about the importance of communication and public outreach, I think we could have done that better. It could have done at least more of it more frequently.



Heidi (10:56):
Do you have criticisms for how the Silicon Valley Bank issue is handled?



Mark (11:02):
Absolutely.



Heidi (11:04):
Care to list some?



Mark (11:05):
Well, I mean, let's start with we know that from data. The FDIC has put out that uninsured depositors would've gotten 90 cents on the dollar even go back to 2008. This just bizarre, crazy to me, to be frank about it. If remember when Lehman failed, as I mentioned, and then primary reserve mutual fund broke the book, investors in primary reserve ultimately got 98 cents of the dollar. We bailed out the entire mutual fund industry because we weren't willing to let somebody take a 2% haircut. So I do have a fundamental problem in Washington where the view is, and again, this is a world where Washington doesn't seem to be bothered, that your cost of living has gone up 16, 17, almost 20% in a number of years. But boy, you let a bunch of Wall Street investors take a 2% haircut, and that's the end of the world.



(12:03)



So let's go back and look at Silicon Valley Bank. Uninsured depositors would've gotten 90 cents of the dollar. I did a back of the envelope calculation. If Silicon Valley itself had suffered losses on those uninsured depositors, it would've been a trillionth of the market. I mean, we're talking a rounding error. So the entire argument that we cannot let creditors even take small losses, I think, it's extremely dangerous. I try to make this point in the book, and it's illustrated, if you read the Federal Reserve's report on Silicon Valley Bank or you read some of the FDIC. I try to find a nice way to say this, but if your confidence in the financial system is because of the examiners and supervisors that your confidence is misplaced.



(12:55)



If you're doing business with anybody in any financial institution, it should be based on the fact that, do I trust these people? Do they have integrity? Do they have character? Because I will tell you, the regulators will always be 1, 2, 3 years behind the curve before problems. And in fact, I would take the view that I recognize as very counter conventional wisdom, thank God for uninsured depositors, forcing the failure of Silicon Valley Bank because it would've taken the Fed another 12 months to do the same thing, and the whole problem would've been deeper. So the importance of all this and the importance of the book is I simply don't think you could have healthy financial markets without market discipline because market discipline is high powered monitoring. I care what you do as a counterparty risk because I have money at stake. Whereas, I believe one person has been reassigned at the Fed because of the Silicon Valley Bank failure.



(13:50)



I don't know a single person who lost their job because of the failures in terms of the regulatory community, because of the failures that First Republic or Signature, or even Fannie and Freddie. One of the shockers to me was the amount of staff we had who clearly missed the ball last time. So again, trying to readjust it. I also say the other side, and again, when I was writing the book, my editor said to me at one point, "Mark, there are times when you're really complimentary about Fannie or Freddie. There are times when you're really critical." It's like, well, it's complicated.



Heidi (14:27):
Right? Naturally,



Mark (14:29):
I did want to kind of project in the book that it's not a black or white issue. There were nuances, there were trade-offs, and I wanted people to understand that and kind of see what it was like to kind of appreciate the choices that we had to make.



Heidi (14:43):
Yeah. Well, I wanted to get your perspective on the things that the Federal Housing Finance Agency is doing now after your departure. There are some interesting things going on with moving from the tri-merge to the bi-merge credit report, and the implementation has been delayed. This is a separate issue, but with the repurchases becoming a real issue for lenders with Fannie and Freddie, and I just wanted you to comment on that, get some thoughts from you on the angst that we're hearing from lenders over the repurchases.



Mark (15:22):
I'll come back to that issue, but since it's a theme of the book, if you will, one of my pet peeves a little bit, I have to admit was off. And even some of the press were guilty of this, not you. Of course.



Heidi (15:35):
Of course not.



Mark (15:38):
There was always this characterization of "Calabria's agenda," whatever, and my response was always, "Here's what the law says, Congress sets the agenda and you carry it out." The relevancy here is Congress set the agenda, particularly Senator Tim Scott said, "I'm going to pass a law that says you have to reevaluate the credit standards that you use at Fannie and Freddie." So the whole [VantageScore, FICO] all that process, I think it's fair to say, I have yet to meet anybody at Fannie or Freddie or FHA who really wanted to do any of that. This was not, something was like, "Hey, let's do this. It'll be fun." Everybody pretty much looked at it and said, "Oh, this is going to cost us a lot of money and a lot of time, and the amount of new borrowers we're going to get is exceedingly small. So why are we doing this now?"



(16:35)



Of course, again, as I say in the book, you make your job as a regulator easier when you don't ask yourself whether congressional decisions are smart or dumb. You just accept them that that's the decision. You do it. We started the credit score evaluation process when I was there. There was, for instance, a back and forth, the original rule as proposed under my predecessor.



(17:03)



I looked at it and said, "I just don't know how you could read the statute and get there." Again, I know people a [VantageScore, FICO], great companies. My look at this was, "We're going to follow the law."



Heidi (17:14):
Well, I'm sorry to interrupt you, but we unfortunately are running out of time. I did want to ask one question, one last question before we go. Who do you think the Republican nominee for president is going to be?



Mark (17:28):
Wow. Again, we are in Vegas, so it's important. It's important when you're at the table



Heidi (17:33):
And you've got a great track record.



Mark (17:36):
I was going to say, it's important when you're at the table to not think about the card you wish it was, but think about the card it's likely to be, and I think it's hard to look at the odds today and not see the Republican nominee as Donald Trump. I think that's very much really where the odds are.



(17:50)



Obviously, a lot can happen between now and the final convention. Obviously, he's got a lot of, wow, there's a lot of wild cards, if you will, involved between now and then, but I have yet to see anybody else really. I mean, DeSantis, I just don't, nobody else seems to have mounted a serious enough challenge. But again, it's extremely early in the process. We're the first round, and I don't know if you'll mention it, but we do have copies of book over in the corner.



Heidi (18:20):
Yeah, that's right. That's right. Mark's going to be over here signing copies of the book. So please line up and join us over there, and thank you all for being a part of this.



Mark (18:30):
Even better, Heidi paid for all the copies, so they're free.



Heidi (18:34):
That's right. Out of my own pockets. Happy to sign it. So you better enjoy, read everything.



Mark (18:37):
Thank you, Heidi. Yes, thanks everybody.