Named president of San Francisco-based technology company Blend in January, Tim Mayopoulos brings a valuable perspective to the financial technology space, having served as Fannie Mae president and chief executive officer for more than six years. Mayopoulos recently spoke with Mortgage Media’s SA Ibrahim about the future of Fannie Mae and Freddie Mac; the kind of risk analysis offered by Blend; the promise that AI offers; and how the housing/mortgage industry is poised to weather a recession, among other topics.
Fannie and Freddie’s Future
Earlier this month, the Department of the Treasury released its plan consisting of recommended administrative and legislative reforms in housing finance aimed at reducing the government role, promoting competition, and protecting taxpayers from the possibility of future GSE bailouts. It calls for recapitalizing the GSEs, putting them on a path to eventually end conservatorship, and establishing regulations to safeguard their soundness and minimize their risks.
“The first thing I’d say is the reform proposal really builds on ideas that have been kicking around Washington now for a good six, seven, eight years,” Mayopoulos said. “You know, when I joined Fannie Mae in early 2009, there was lots of talk about abolishing Fannie Mae and Freddie Mac, starting over from scratch, building a brand-new housing finance system.” But as time went by and the GSEs recovered, delivered financial value to taxpayers and promoted stability, in Mayopoulos’ view, “in the housing finance market, people began to appreciate that there’s a lot about that system that works well and that we should preserve that and we should fix those things that need fixing.”
Treasury’s report represents a moderate and measured move toward progress, Mayopoulos said. He noted that the rhetoric isn’t radically different than that offered by the Obama Administration. It doesn’t throw the baby out with the bathwater, he noted.
Mayopoulos said the reform proposal makes it clear that Congress will almost certainly have to take legislative action, whatever route is taken. For instance, if policymakers want new institutions chartered to compete with the GSEs, or if they wanted there to be an explicit government guarantee on mortgage-backed securities issued by the GSEs and any new competitors, only Congress could grant that authority or provide that guarantee. But, he added, the Administration is also clear that “there are a number of administrative powers that it has through a combination of people at Treasury and at FHFA (Federal Housing Finance Agency) that could move reform forward faster than waiting for Congress to do that.”
Mayopoulos added: “I think the good news around the reform proposal that the Administration has put forward is that it clearly would preserve the 30-year fixed rate mortgage, which has become a cornerstone of US housing finance. It would promote stability in the marketplace. If it’s executed well, I think it would avoid potential disruption. It would keep many of the key elements that Fannie and Freddie currently deliver to the market today. And it would preserve the system that lenders and borrowers both really rely on pretty heavily today.”
Ultimately, GSE reform can, and should, create more opportunities for private players in the mortgage space, Mayopoulos noted, as a major objective is that “there should be substantial private capital in front of any taxpayer exposure.” And that seems to be where the Administration proposal is leaning, he said: recapitalizing Fannie and Freddie, making them shareholder-owned companies again. And, thus, having private capital take the first losses before there’s any government exposure to potential loss.
How this will work remains unclear, he added, noting that Washington invariably thinks about the GSE issue in terms of politics rather than corporate finance. But for any reform to have the desired effect, it’s going to require across-aisle broad political consensus, to assure stability as the players and parties in the White House, and Congress, change. Investors aren’t going to be comfortable bringing their private capital to the market if there’s a significant possibility for radical change in direction between Administrations, he noted.
“If you want to be able to attract tens of billions — if not hundreds of billions — of dollars of private capital to this market, you need to be able to put forward a housing finance system that those investors can feel confident will be in existence, not just for the next couple of years, but for the next 10 or 20 or 30 years.”
Moving into the 21st Century
After leaving Fannie Mae, Mayopoulos said he asked himself what excites him most about financial services. He said one focus during his time at Fannie had been undertaking innovation efforts like Day 1 Certainty, ways of “bringing the housing finance system into the 21st century from a technology perspective.”
And he saw Blend as a nimble FinTech company with the same focus. He said he and Blend Founder and CEO Nima Ghamsari had a common vision: Consumers should have the capability for instant access to their credit information, and they should be able to apply for and receive mortgages digitally — in a manner that’s faster, less expensive, easier and fundamentally safer for all parties (including the end investor, whomever that may be). To do so requires pivoting the housing finance system away from paper and toward data.
That’s where companies like Blend comes in. “We facilitate borrower digital applications for mortgages, but more fundamentally we integrate all of the different data sources that are necessary to underwrite and fulfill that mortgage and deliver it to the secondary market in a very efficient way,” he said.
And while the industry can be slow to adopt change, digital mortgage as the norm is on its way, Mayopoulos said — and soon.
“I feel really excited about the fact that six or seven years ago people would tell me that the mortgage industry would never permit someone to go apply for a mortgage on their phone and have it fulfilled within days. Not only do I think people believe that that’s possible, they actually think that’s going to happen here very quickly,” he said. “And I share that excitement. I think that that’s the endgame and it will be great for consumers. It will be great for lenders, and it will be great for investors and taxpayers.”
Particularly if a company has access to customers’ pertinent information — the kind of information Blend can provide — the company should be willing to instantly give someone a refinancing deal for better terms and convince the secondary market that the data and analytics justify it, Ibrahim inserted.
“Not only should that happen instantly, it should happen proactively,” Mayopoulos responded. “My goal is to get financial institutions in a position where, in mortgage and across all consumer banking products, financial institutions can bring forward to their customers proactively suggestions on how they can put themselves in a better financial position,” giving them the opportunity for a better mortgage rate. And it should be a “one-tap solution,” he added: “Customers should be able to make a one-tap solution. Click on a button on their phone to say, ‘Yes, I want that. I accept that.’ And have their financial institution fulfill that.”
Most financial institutions haven’t built the tech themselves to facilitate this scenario, but there’s a growing understanding that they need to make it happen, Mayopoulos said, which is where a company like Blend can help. There’s no real choice, he noted: Consumer expectations will mandate it. People have become used to instant, online transactions; their expectations have been set by companies like Amazon, Google and Apple. “People can’t understand why their interaction with financial services can’t be as fast and simple and as satisfying as all of those experiences.”
Amazon itself might very well get into the game itself, offering the one-tap mortgage approval experience and bringing scale to it, Mayopoulos noted: “I wouldn’t be shocked to see them try to do that.”
AI, Data and Risk
Technologically verified data is important coin in the industry, a potentially significant draw for private investors. This is particularly important as the industry moves in that direction with what’s happening with the GSEs, which continue to evolve their own automated underwriting systems, Mayopoulos noted.
“There’s an opportunity here for there to be created new, privately capitalized marketplaces for mortgage credit,” he said. “I could easily imagine a world where private investors look at AI-generated mortgage results and say, ‘We want that. And we’re prepared to essentially stipulate to that. And if you can generate enough of that at scale, we’ll buy at large volumes.’ So, I think the advent of this technology and the data analytics around it will likely diversify the pool of investors for mortgage credit.”
Quite simply, entities will be more willing to assume risk if they have it on good, verified, data-driven authority that the risk is low.
“I think we’re all aware that the private label securitization market has not really recovered since the crisis. And I think one of the reasons — there are many factors contributing to that — but one of the reasons is a lack of confidence in the financial intermediaries to actually verify the data that’s in mortgage loans,” Mayopoulos said. “I think in a world where the data’s already been verified through technology, it opens up lots of possibilities for those kinds of markets.”
The GSEs have been successful in building a credit risk transfer market to enough scale that it has sufficient liquidity — “remarkably successful” given the short time frame they’ve done it in, Mayopoulos said. “I think that the way Blend and other technology companies can assist them is to automate and verify as much of that data collection process as possible so that it becomes essentially a straight-through system so that the end investor — whether that’s a buyer of a Fannie Mae credit risk transfer security or whether it’s some other separate private marketplace — can digitally inspect what’s in large pools of mortgages in a very fast and efficient way,” he said.
“Even today, a lot of private investors continue to hire companies to go out there are pore through hard copy paper files or data tapes. It just doesn’t make any sense in a world where we have this much data available digitally and lots of machine learning and artificial intelligence to apply to it.”
Mayopoulos said he doesn’t make economic predictions. After all, he wouldn’t have believed it a year ago if someone told him about today’s interest rates. But he figures a recession of some sort is inevitable, part of the cycle. But he also believes the industry is poised to weather one than in years past.
“I feel as though over the last 10, 11 years, the industry has made very significant strides in positioning itself to better withstand a recession,” he said. “… Whenever that next recession comes, I think housing prices should be much more stable. The underwriting standards that have been applied to grant mortgages, to borrowers, have been much better and much more strictly applied and consistently applied. I think consumers have been behaving more conservatively than they were in the years leading up to the crisis.
“So, I actually feel pretty good about where housing sits and its ability to withstand a recession,” he concluded. “Doesn’t mean there won’t be some markets that don’t see a significant decline — not necessarily of the magnitude we saw in the last time around, but overall and on average I feel as though the industry is in pretty good shape.”
What the Future Holds
So, what excites Mayopoulos most about the future, and in being at Blend for that future?
The big thing: All of the innovation in financial services is technology-oriented, and there’s a growing realization on companies’ part that that’s the case.
“This is the future of financial services, and there’s so much untapped potential here,” he said. “I think everyone’s eyes are opening. They recognize that there is potential there, but there’s still so much work to be done to realize all that. So, I’m excited about the fact that we’re creating really delightful customer experiences even in the mortgage space and I think they’re only going to get that much better.”
He expects to see that “one-tap mortgage” in the very near future — “where consumers basically rely on technology to collect virtually all the data about them and get themselves approved.” Then the industry can turn its attention to driving down the cost of underwriting and originating, for the sake of both lenders and borrowers, he noted.
“And then ultimately, I think I’m excited about the fact that we are, together through all of this work, creating a safer, better housing finance system,” he said. “I don’t think I’ll ever be able to take off my old Fannie Mae hat. I continue to think about housing finance as a multi-trillion-dollar national market that’s critically important to the economy. And I’m really excited about our ability to actually create a better housing finance system going forward.”