"The mortgage system is very safe"

Ten years ago, on Thursday, as the US real estate market threatened to collapse, the US government took control of the mortgage giants. Fannie Mae and Freddie Mac. At the time, the two government-sponsored companies, or GSEs, owned or guaranteed almost half of all single-family mortgages in the country. As the claims on these mortgages accumulated, the companies quickly lost money and investors feared that Fannie and Freddie did not have enough capital to remain solvent. the bailout have authorized the US Treasury to purchase up to $ 100 billion of Fannie and Freddie shares, and the companies have been placed under the control of their regulator, the Federal Housing Finance Agency. A decade later, the two companies remain in trusteeship.

This week, Freddie Mac announced that his CEO, Donald Layton, will be leaving next year. The main market correspondent, Amy Scott, has recently been keeping up with Layton, who took the helm in 2012, of the company's evolution.

You will find below a transcript of their conversation.

Amy Scott: You had a long career in the private sector at JPMorgan Chase and then at E-Trade. What made you want to take this job at Freddie Mac?

Donald Layton: I was already retired when I was contacted to direct Freddie Mac while he was under the control of the government and under the tutelage of the government. This has kind of triggered a long inactive desire, even since the college years, to do public service after finishing my professional career. And the nature of this work has a foot in the world of running a business and a foot in the world of government services and policies, so that's what struck me.

Scott: It is interesting that you say government or public service, because in some ways it is a government job. What does it mean to be under guardianship? Your shares are listed on the stock exchange, but you are supported by the government. What does this mean in practice?

Layton: In practice, this means that it is a kind of hybrid. You run a business as if you owned your shareholders in many ways, published financial statements, and SEC guidelines. But in reality, your fiduciary duty is to the government. The government can give us orders as much or as little as they want. The law puts them in charge while we are in guardianship. It's sort of a strange hybrid that has become very common for GSEs for 10 years.

Scott: So, bring me back to September 6, 2008, when the Treasury Department stepped in to bail out Fannie and Freddie. What do you remember about this time and this news?

Layton: We must not forget that time has been a period of great tension and uncertainty in the financial markets, with all kinds of tensions, companies that have experienced difficulties, financial companies. In fact, I joined E-Trade as part of a recapitalization bailout because they were probably the first company known to suffer from the financial crisis. This month of September was the month of September of the setting in guardianship of the GSE. In September, Lehman Brothers failed. This month of September, that's when AIG was saved. It was a time when everyone was concerned about the global collapse of the financial system. In this sense, the GSEs supported were only one of the major daily events.

Scott: And of course, you were engaged with a different part of the financial markets at that time. Do you remember thinking that the government's takeover of these organizations, which were quasi-governmental organizations, was a major problem?

Layton: The answer is that I remember, but honestly, E-Trade has been under tremendous stress, so I focused on that. GSEs were only a part of the tensions and the government's takeover almost removed them from the list for future stress. So, it was a little bit done and where the other concerns, again Lehman Brothers, AIG and others, were more messy situations if you will.

Scott: Right. And these still had to come of course. Thus, ten years later, the real estate market is booming, the economy is booming. Why are Fannie and Freddie still under guardianship?

Layton:This is a two-step answer to this question. The first step is why not just bring them back to the way they were? Let them raise capital so that they can be financially sound businesses and let them go. And the answer to that, is that there was a bipartisan consensus within the government, generally accepted that the system had very strong flaws and that they could not come back to it because of these defaults. They must be fixed first. The most common, unintentional but ultimately important defect was, for example, the unlimited ability to use government-sponsored funding to generate these giant investment portfolios that generated most of the profits. This was not considered something that was to happen, it was not a good thing. So, everyone is in agreement to change the system. But there is a major political disagreement about what change should be. On a more progressive level, it preserves affordable housing goals and encourages businesses to play a leading role in traditional mortgage markets. On the Conservative side, it reduces them, they should have less role, the market should be more private. And this debate continues without any resolution in sight.

Scott: Do you still need, in your opinion, support from the American taxpayer?

Layton: Yes. The reality is that Freddie Mac is one of more than a dozen businesses and organizations that the federal government has created over the decades to support housing, and that the business model of all these businesses requires support. federal responsibility. Prior to retention, this support was known as the implied warranty. If you consulted S & P or Moody's and read their analysis, they would say very clearly that "we give them a triple A because of the implicit federal guarantee". This is not a complete guarantee, but close enough for the markets to treat us not as if we were the US Treasury, but rather in terms of credit quality. So, yes, the whole business model requires federal support in one form or another.

Scott: And yet, you have more than reimbursed taxpayers since the bailout and you have embarked on a program to transfer much more risk to private investors. Talk about this effort.

Layton: The Achilles heel of the GSE system and these other agencies is that we end up being monolines, that is, one business sector, of course, the mortgages, and we had the extremely significant credit risk . We have about $ 2 trillion in mortgages. The credit risk on this one is obviously not diversified in reality compared to the other classes of the assets. And so, when the mortgage asset class has problems, companies collapse and that is what led to the preservation. One way out of this riddle, to be a monoline with a legal obligation to support the mortgage markets, is not to settle for credit risk, to sell it to private capital markets, to institutional investors. It has been a glimmer in people's eyes for many years. Freddie Mac, between my background and some of the people who worked there and some support from the government, was able to take that broad notion and turn it into large-scale, real-life transactions that are becoming more credit risky and sell to investors so they are on the hook. We pay them, it costs money. We have been able to determine how to do it very effectively so that it does not cost too much. And as our portfolio is renewed, more and more of our credit risk is going to private investors. This means that the taxpayer is lagging behind and this is one of the main public policy goals we have.

Scott: We talked about the prosperity of the real estate market, but home ownership is still out of reach for many Americans. Prices continue to rise and banks are more restrictive in lending, which should be the case, but some people argue that it went too far in the other direction. Are you doing enough to help low and middle income people become homeowners?

Layton: This is a very good question. Obviously, as a public policy organization, what we were, we have a threading needle. On the one hand, we want to give as much credit as possible to the American public, let's call it the middle class and the working class. That's why we are here. At the same time, we are in a corporate business format that is supposed to be prudent, safe and sound in our credit policies and provide quality loans. There is no point in making mortgages that people can not pay back. That was the lesson learned from the financial crisis. So we strive to find creative ways to make quality credit decisions while being safe and sound. So we think we've done a good job, but we're just one of many factors that make homeownership less than it has been in the last few decades. So, we can only do a lot. We do what we can. In general, we have received very good praise from the different political organizations, namely to meet the two masters: access to credit but also safe and healthy loans.

Scott: May I ask you, do you think the system is healthy now? I mean, could we see a real estate bubble like we did 10 years ago?

Layton: Well, the system is much better than in the past. All financial institutions have much stronger support, much higher capital ratios. The CFPB [Consumer Financial Protection Bureau] The concept of quality management, qualified mortgages, means that people do not particularly make teasers, or anything that is not going so well, that has suffered heavy losses and a little abusive before the financial crisis. So, the essentials of the mortgage system is very healthy these days. But there are always fringes, people can do things on the sides. There is a part of this figure that is increasing, but it is very small right now and I would not say it's on the same planet as it was before the financial crisis. You always have to be vigilant and people are always sensitive about it, but it is really very small this time.

This interview is part of Divided Decade, a one-year series on how the financial crisis has changed America.