You don’t get much more star-power in the mortgage industry than a conversation between Dave Stevens and Michael Bright. When the two recorded a podcast last week, they were speaking their minds freely – something that might not have happened as often in their previous roles. Not that you’d imagine they ever held back too much … you get the impression that their opinions have always been Housing gospel.
Since retiring as President and CEO of the MBA, Stevens has taken on the role of senior advisor for Mortgage Media. He’s been writing articles and conducting podcast interviews with a variety of industry experts. He’s also still a lightning rod for the anti-GSE-reform crowd. It’s remarkable to see the number of tweets any time we run a story that mentions “GSE.”
When news broke in January that Michael Bright when leaving his post as Ginnie Mae’s leader, it was no surprise that Stevens sent him an email about recording a podcast. Here was another major domino in an industry where leadership turnover was already at a historic level.
Bright responded right away that he’d love to talk with us.
Their half-hour conversation covered Bright’s time leading Ginnie Mae. They looked back at Bright’s time working for Senator Corker, helping author the Corker-Warner Act. They delved into GSE reform (throwing more fodder to the GSE trolls). And they concluded with a discussion about securitization, with Bright’s new role as CEO of Structured Finance Industry Group (SFIG). Listen to the recording on our podcasts, and make sure to subscribe to Mortgage Media on iTunes, or listen to the recording directly here on the site.
Looking Under the Hood at Ginnie Mae
Ginnie Mae suffers from a bit of an identity crisis. Unless you work with it directly, you don’t think about it. “Even in the industry, you don’t think about Ginnie all that much. And prior to going to the Milken Institute, I don’t know that I could have described in detail what Ginnie even does,” Bright said, asked by Stevens about his experiences and challenges at the government-controlled entity.
In 2013, Bright had been working with Ed DeMarco, trying to put pen to paper “on ideas for how the continued evolution of our housing financial system might be blessed and codified by Congress in a way that makes sense.”
They wrote the Corker-Warner Housing Finance Reform and Taxpayer Protection Act, introduced in 2013. This has evolved into Johnson-Crapo.
“There was always this idea that … number one, there would be some sort of an insurance fund for the resolution of Fannie’s successor entity, Freddie’s successor entity, and anybody else who was in that market. That you would have an FDIC-like resolution for those companies, so that they can be wound down and have their assets transferred so that, bankruptcy, or at least OLA was an option. So if we were going to privatize companies, you wanted to have some sort of resolution regime be an option.”
In their bill, they created the FMIC. “Which sounds like FDIC, and is meant to sound like FDIC.”
So we started kicking the tires … does it mean something that we haven’t figured out? What that guarantee means, and how it would run?
“We always said that there would be a full-faith-and-credit wrap on the mortgage-backed security, but it was really just sort of a line item. We never really delved into exactly how that works,” Bright said. That’s when he and DeMarco realized they’d been thorough on the resolution process for these entities – but it was different than a wrap on the mortgage-backed security.
All banks have FDIC insurance, Bright explained. And the big banks are subject to OLA under Dodd-Frank Title II. “But that doesn’t mean that their debt is guaranteed. Just because there’s a resolution mechanism in place. Just because there’s a government entity responsible for shutting them down if they were to make bad decisions – that has nothing to do with whether or not the product of the issuer, or the mortgage of the issuer, is itself guaranteed,” Bright said.
They realized the Johnson-Crapo, Corker-Warner construct had “a big gaping hole in it.” They had a resolution mechanism for the companies, but no apparatus for actually guaranteeing the MBS, other than a bunch of statements that it would be guaranteed.
“So we started kicking the tires … does it mean something that we haven’t figured out? What that guarantee means, and how it would run?”
That’s where Ginnie came in.
“We looked under the hood at Ginnie and realized that, lo-and-behold (and this is our ignorance for not really understanding this at the time), the process of having a full-faith-in-credit guarantee is quite extensive.”
For those mortgage die-hards who want the technicalities, you won’t be disappointed here (since we’re not a print publication getting measured by the inch). According to Bright, the process involves establishing rules for the collection of P&I. It involves monitoring the aggregation of P&I and T&I over the course of a month. It involves ensuring that those get paid to an investor on time, whatever the scheduled date is. (“In the Ginnie Two program, it’s the 20th of the month. With UMBS it’ll be the 25th, I think, of the month.”)
What it comes down to is, having an entity that is in charge of making sure those monies get paid. And then that entity also has access to funds at the treasury department, in case there’s any P&I that’s missing. If you’re a full-faith-and-credit MBS, you need a process for accessing your funds, paying the end investor, making sure that everything is done on time, and then recouping any shortfall from those before you in the value chain. And then finally, there’s a legal construct, which is what a full-faith-and-credit administrator is – a legal construct that stamps the bonds and ensures to investors they’ve been stamped.
We realized that you turn over this rock and there’s actually quite a bit there.
“It’s become mantra inside of Washington, that any reform should have a full-faith-and-credit guarantee on the MBS. But then it was just a sentence that everybody swatted to the side, and nobody really said, ‘Is that a process? How do you build that? What’s the different between that and resolution of an enterprise?’”
Bright wanted to dig deeper.
“We realized that you turn over this rock and there’s actually quite a bit there,” Bright said
The opportunity came after the 2016 elections.
“When the Trump folks came to town, I didn’t know any of them. They certainly didn’t come to town with thousands of people and bench seats ready to take over the bureaucratic administrative job of running a government,” Bright said, referring to himself as apolitical.
All of a sudden, it’s like you have this opportunity … is there something that you want to do? There was all this wide-open space.
“My impression was that the Clinton team was very, very deep on policy stuff, and had thousands and thousands of people, and drapes were measured, and all that kind of stuff. Certainly that was not the case with the Trump folks.”
Thousands of jobs in the Capitol needed to be filled by a new administration that wasn’t ready.
“I guess it’s just the nature of Washington that you get tagged with a political party affiliation even if you don’t really want it,” Bright said. Because he had worked for Senator Corker, he was identified as a Republican.
“All of a sudden, it’s like you have this opportunity … is there something that you want to do? There was all this wide-open space,” Bright said. “I just threw my hat in the ring and said ‘Look, this Ginnie Mae thing is interesting to me from a policy perspective. It seems like a really important function in our mortgage market that’s massively not appreciated, or way underappreciated, and way under-understood.’ So that was intriguing to me. I threw my hat in the ring, to try and run the place, and ultimately ended up getting it.”
Bright came to Ginnie Mae as Executive Vice President and Chief Operating Officer, and served as interim president. He ran it for two years.
“If there’s anything I learned from Ginnie Mae, it’s that – saying we’re gonna have a full faith in credit wrap on MBS, doesn’t happen with a magic wand. It doesn’t happen with pixie dust. It’s a bureaucratic process like any other bureaucratic process, that’s separate and distinct from any other mortgage-related process that exists in this world,” he said. “It’s the only institute that does ‘full-faith-in-credit, government’s on the line, make sure P&I is there’ as its core mission. And that was kind of an interesting thing to learn about. It was a fascinating couple of years.”
Bright pointed out a couple advantages Ginnie has in an industry that has constraints at so many levels – especially with its position as a government-backed entity.
The first benefit: It’s physically outside of the building.
“It does have a little bit of a different culture. It feels like a hybrid. Kind of like something between a GSE and HUD, so it’s a bit of a spectrum. And if anything, maybe a little bit closer to a GSE with a niche role,” he said.
The other major difference, according to Bright: Due to how it was founded by Congress in 1968, Ginnie can spend revenue on external resources, subject only to GSA rules, regardless of their appropriations process. Ginnie Mae brings in a couple billion dollars a year in revenue from both G-fees and periodic commitment fees. They have to go through the GSA process for government contracting, but they do not need appropriations approval to do contract work.
There are some talented folks at Ginnie who love the challenge of what they get to do, but there’s this constant draw to FHFA and even Fannie and Freddie where you can do more narrow jobs for more money. And for people who are starting out with a family, that’s often very appealing.
Bright lists examples in numerous areas. Tech buildouts. Modernizing the pooling process. Bond administration. “All those things don’t need to be appropriated. You can go and procure a contract.”
Where Ginnie is hamstrung, Bright says, is how salaries and expenses are subject to the GS pay scale.
“You can literally walk three blocks down the street and go to FHFA and do a smaller job for $50,000 a year more, in some cases. And sometimes people do it,” he vented. “The people who don’t, the people who stay at Ginnie, tend to stay mission-oriented folks. Ginnie generally has a lot more flexibility. It’s a smaller staff with a huge responsibility and a very clear mission. There are some talented folks at Ginnie who love the challenge of what they get to do, but there’s this constant draw to FHFA and even Fannie and Freddie where you can do more narrow jobs for more money. And for people who are starting out with a family, that’s often very appealing.”
“And the irony of that is … of all the segments of the market that we really do … I think there is broad agreement that should be subsidized. That’s the segment of the market. It’s the first-time home buyer, the veteran home buyer, the rural home buyer. But ironically, that ends up being the segment that has to fight to keep its talent there in the operational side.”
The Path Forward on GSE Reform
Bright referred to GSE reform as “an emotionally draining issue,” adding that the value he could bring to that conversation, was to run Ginnie very well and to be a technical expert on what it means to have a full-faith-in-credit wrap on MBS, and then to explain that to people – all the while, being an advocate for Ginnie as the entity that could do that.
“Just the function of saying, ‘Listen, every proposal has this idea that there’s some sort of role for the government, let me explain to you what an explicit guarantee means and how it is operated, and how Ginnie could do it, and how it makes no sense to have two entities doing the exact same thing.’ That was really my involvement.”
Bright said Congress’s activity on GSE reform has been more productive, in some regards, than people give credit for.
I think Congress has done a reasonably admirable job as an overseer of this. When certain things looked like they weren’t going the direction that maybe the center of gravity of Congress wanted, Congress finds ways to assert its authority. In the meantime, it’s ‘let the FHFA, Fannie, and Freddie feel their way across, but slowly get across the river.’
“The dynamic has been an evolution of the secondary mortgage market, specifically Fannie and Freddie’s role. The FHLB’s role, set that aside. FHA’s role, countercyclical, really big, and then how do we deal with it?” Focusing on Fannie and Freddie’s role in the economy, and then in the secondary mortgage market, Bright points to the constant change.
“I think Congress has done a reasonably admirable job as an overseer of this. When certain things looked like they weren’t going the direction that maybe the center of gravity of Congress wanted, Congress finds ways to assert its authority. In the meantime, it’s ‘let the FHFA, Fannie, and Freddie feel their way across, but slowly get across the river.’”
He points to “pockets of energy where Congress has taken small leaps forward, in both its own knowledge of the issue, and in setting the four corners of what’s an acceptable outcome.”
The first great big thrust of that started in 2013, Bright said, when they introduced Corker-Warner.
“We had 12 hearings on it. Then there was a lengthy behind-the-scenes evolution of that, into Johnson-Crapo, and then that emerged. And then there was a huge debate over that. And then a committee markup. And then we had this big leap forward in knowledge of all the members of Congress,” he said.
But now, everybody’s dealing from a different base of knowledge. “I think the last two years saw a pocket of ideas come out, and another set of evolution of ideas and knowledge, and Congress sort of being willing to set corners of debate.”
He sees what’s been happening as a healthier interaction than some people give it credit for, in terms of Congress framing what’s acceptable, nudging what’s not acceptable, and letting FHA, Fannie, and Freddie evolve.
“Did every piece of evolution go the way I would’ve done it? A thousand percent no. There are so many things that I would’ve done differently if I were emperor of the world. I’m not emperor of the world, there’s no such thing as emperor of the world, so that just is what it is.”
Ultimately, Bright believes, that for whatever we get to work, it will require congressional action. That view was underlined by his meetings with institutional investors when he was at Ginnie.
“You go to Japan, you go to China, you go to Singapore, go to the UAE – anywhere there are these pockets to invest in US fixed-income securities. And you say, ‘Hey, US mortgage-backed securities, we’re in the Barclays Index and we’re here to talk to you about these bonds.’ The first thing they do is they say, ‘Where’s Congress on it? What’s the law in it? What’s the history? What’s the precedent? What’s the brand?’ They check the legal backing to make sure they’re on the right side of US public policy. And I just think that as long as Congress hasn’t given a stamp, then there’s going to be a lingering uncertainty.
“I think, eventually, there’s a role for Congress to say 90% of what FHFA, Fannie and Freddie did, we bless.” Then identify the parts they want different and the new rules that need implementing.
“Fannie and Freddie, they’re creatures of Congress. They were created by Congress. They were created through an act of Congress. Ginnie was an act of Congress. Congress needs to be engaged and they need to be informed. There’s a lot of pieces to that.”
Instead of the world being dominated by a few mega-banks who just make loans and put them on their balance sheet (like banking is done in some of the more antiquated financial systems around the world), with securitization you are matching a borrower with an investor globally.
New role at SFIG
Bright explains that securitization, at its core, is an old process: Taking up loans, pooling them together, turning them into bonds, and selling them. Investors buy them and monitor the performance of the bonds. This has been a feature of finance and banking dating back to the Great Depression, and even before then.
“If done properly, this is a valuable tool for banks. To be able to make loans, and continue to make loans, and to allocate cash flows of a loan to an investor, who’s appetite matches those cash flows,” Bright said. “So instead of the world being dominated by a few mega-banks who just make loans and put them on their balance sheet (like banking is done in some of the more antiquated financial systems around the world), with securitization you are matching a borrower with an investor globally.”
So the person who’s actually making the loan could be PIMCO. Black Rock. Calpers. A pension fund in Boston representing firefighters. “You get this global capital markets of investment appetite, that can be specifically matched with a type of loan that’s made to a consumer.”
SFIG as a group has a value chain from issuer, to rating agency, to data analytics provider, operational provider, and of course – the investors. “We look for areas where that segment, that entire encapsulation of this industry, can find consensus. And advocate for things that it has consensus on. And educate policy-makers about what it does.”
The biggest challenge for SFIG is that people don’t know what securitization means. “They don’t know what the motives are. There’s a lack of trust, sometimes, between the American public and policy-makers and professionals who are involved in the business of taking loans, turning them into bonds, and either selling or buying them, being on the other end of that.”
Bright sees huge open fields of space for SFIG in the area of educating policy-makers about securitization, connecting industry leaders with policy makers, and building a two-way dialogue
“Elevating the level of conversation. I think that’s what we did in housing finance,” Bright said. “One of the biggest accomplishments, is we elevated the level of dialogue. I’d like to elevate the level of dialogue here.
Bright referred to Stevens, who recently retired as head of the MBA. “A lot of people are drawing parallels with what you were able to do at the MBA, when you had an industry that was a little maybe misunderstood by the policy-making community. And had a real desire of positioning itself to be in a helpful spot, where it could actually facilitate a dialogue between members of an industry segment and the public policy-makers who have received that industry segment. I think that there’s a lot of desire amongst the investor community and the securitization community to try and replicate that here.
“So those are big shoes to fill, but we got a lot of brain power, a lot of talent, and a lot of great members.”
David H. Stevens, CMB, is Senior Advisor at Mortgage Media, and former SVP of Single Family at Freddie Mac, former EVP at Wells Fargo Home Mortgage, former President and COO of the Long and Foster Realty Companies, former Assistant Secretary of Housing and FHA Commissioner, former CEO of the Mortgage Bankers Association