Paul Mullings' Speech to the Northeast Regional MBA Conference on March 19, 2008

Prepared Remarks for Paul Mullings
Senior Vice President of Single-Family Sourcing

Northeast Regional MBA Conference
Atlantic City, New Jersey
March 19, 2008

It's great to be back in Atlantic City. Last year, I was speaker number 5 in this session, which made me feel like the 5th Beatle – on the outside looking in. But now I have moved up to the third spot, which puts me squarely in George Harrison territory. My goal next year: Lennon-McCartney.

Let me join others in saying "congratulations" to Bob Levy and the New Jersey MBA for celebrating 25 years of the Northeast Regional MBA Conference.

I have to hand it to Bob. Back in 1983, I decided to move to California to work at Glendale Federal. A great career move, except for this little thing called the S&L crisis. Bob, on the other hand, was right here in New Jersey, representing mortgage bankers. A much better decision at the time.

Given the current environment, Bob's leadership is needed now more than ever. And we at Freddie Mac look forward to working with you, Bob, to help your members – our customers – get through this difficult time in the marketplace. On behalf of Freddie Mac, Bob, you have our deep thanks for a job well done.

A Market Under Duress

Over the years, Freddie Mac has been a constant presence at this conference. But, aside from the S&L crisis, I cannot remember a time when the industry was under such extreme duress. Nor can I remember when the industry was so dependent on Freddie Mac, Fannie Mae and the FHA to get it out of trouble.

We all know what has happened. But what we don't know is how long this downturn will last. And we don't know the final price that will be paid.

We know that new players entered the mortgage market during the housing boom. They pushed aside the GSEs and FHA by offering more liberal credit terms and by heavily layering risk. They assumed that rising house prices would offset bad decisions. And they structured risk in a way that dramatically understated it.

But then house prices turned negative – sharply negative in some areas. Subprime and Alt A loans created a wave of foreclosures that spread to the broader market. Suddenly faced with unexpected losses, the private-label market collapsed. The subprime market closed down. And even the jumbo market froze up.

Among those affected: mortgage lenders. Your revenues are declining. Your markets are shrinking. And for those of you that hold loans in portfolio, your asset values are falling and credit expenses rising.

Freddie Mac is not immune from these same trends. We, too, are bearing the cost of rising expenses in credit, capital and funding. And if you check our stock price, you can see that our market capitalization is way down.

Still, last year, we purchased more than $470 billion in mortgages. Our single-family portfolio grew 2 ½ times faster than the broader market. We stayed in this market because that's our job, that's our mission. As a result, the GSEs are supporting more than 70 percent of the loans being made today.

Clearly, you are depending on us. And we want to come through for you. What's more, through our actions, we want to encourage the market to rebuild confidence with itself and with the American homebuyer.

So let me talk about what Freddie Mac is doing to support our customers and the broader marketplace.

Freddie Mac's Broad Mission

When I joined Freddie Mac, I was introduced to Mission 101. It described how Congress had authorized Freddie Mac to support the mortgage market.

Most of you are familiar with our affordable focus. Every year, more than half of our business volume supports families of modest financial means. And the mortgages we support are generally less expensive to homebuyers than other types of loans.

But we are chartered to provide liquidity as well. Essentially, when markets lock up, our job is to unlock them. Whether a crisis is caused abroad or here at home, Congress looks to the GSEs to provide a steady flow of mortgage funds to lenders. Moreover, we are expected to support standards that bring stability – that bring confidence -- to how the industry operates.

There is no better example of this broad mission than the current environment.

Enhancing Stability

Let me start with stability. To paraphrase, stability starts at home – the family home.

Today, there is a foreclosure crisis sweeping the nation. Industry studies tell us that 1.3 million homes began foreclosure proceedings last year – up 75 percent from the year before. As house prices continue their decline, and certain loans reset their rates upward, experts believe that foreclosures will approach two million this year.

Now, most of these foreclosures involve subprime mortgages, and thus largely outside the reach of the GSEs. But on the loans we own, we are partnering with Servicers to work out as many loans as practical.

Last year, because of Freddie Mac and our Servicers, almost 50,000 families that had run into financial trouble were able to keep their homes. Right now, we are working out roughly 1,000 loans per week – where 90 percent of the affected families keep their homes. And we continue to add resources in this critical area.

We have taken further actions to help stabilize the mortgage market.

For example, we have restricted mortgage insurers' use of deep-cede, captive reinsurance. By requiring MIs to hold on to more premiums, we are enhancing their capacity to pay claims and otherwise improve their capital position. Mortgage insurers play an essential role as counter parties. And their financial soundness is critical to Freddie Mac and to the industry as a whole.

Additionally, we have agreed with the New York Attorney General to enhance the independence of home appraisals. Beginning in 2009, appraisals on the loans we purchase must comply with a new code of conduct.

No one action will bring financial stability and consumer confidence back to the housing finance system. But if we make the right decisions on the big issues facing us today, we will build a stronger system for the long run.

Providing Liquidity

Of course, to improve our industry, you need to keep making loans. That won't be easy, given forecasts of further declines in home sales and house prices. What's more, the industry must realize that it cannot continue practices that led to higher foreclosures.

Accordingly, Freddie Mac will continue to provide liquidity to our customers. But it will be liquidity based on sound underwriting. And it will be liquidity based on risk-based pricing.

Over the past several months, we have announced several changes to this effect. Some have already been implemented. Others will be implemented in June. But taken together, these changes better tie pricing to the costs of individual loans, while saying "no" to the extensive layering of credit risk.

Average pricing worked when we had a smaller, more uniform book of business. But as we see greater distinctions within a bigger book, risk-based pricing seems appropriate. And, combined with sound credit principles, it will sustain our liquidity for the long run.

Now, it is not just the conventional market we are being asked to support today. Congress and the President have turned to the GSEs to support the jumbo market as well. In that market, a lack of liquidity has pushed mortgage rates up to a record high, relative to GSE loans.

To jump-start jumbos, our loan limits have been raised temporarily in high-cost areas. And last week, Freddie Mac launched our conforming jumbo program. We will focus on bulk purchases initially…expand to flow loans for May-June deliveries…issue securities in the non-TBA market…get this market lending again… and on better terms for the consumer.

We have published pricing and credit criteria for these loans, including a feature that allows for cash-out refinancing. What does this mean for lenders making loans in New Jersey, New York and Pennsylvania? It means that the GSEs have higher loan limits in 33 counties, with 20 of these counties going all the way up to the maximum of $729,750.

Supporting Affordability

The industry and policymakers are relying on the GSEs in ways not seen in many years. And in areas such as pricing and credit, we have made some tough choices. Another area filled with tough choices: affordable housing.

Let me be clear: As an industry, we absolutely must not change our commitment to affordable housing. However, how we fulfill that commitment absolutely must change.

Demographics tell us that the Affordable market remains a growth market in housing. And if you are in a housing-related business, you want to be in this market. But if we learned anything from the housing bust, it is that no one wins when families are given a mortgage they cannot pay. As rising foreclosures and delinquencies indicate, that happened all too often during the past few years.

Accordingly, at Freddie Mac, we are maintaining our affordable focus. But we are doing so with a more balanced approach between homeownership and rental housing.

For families that can pay the mortgage, we will help lenders make the right loan. For example, last year we kept $45 billion in qualified loans out of the subprime market. We launched a consumer-friendly alternative to subprime. And at this very conference, I defended our decision to stop investing in certain subprime loans that, quite simply, take advantage of families. At some point, no mortgage is the best mortgage.

That's why Freddie Mac also has a multifamily business. Last year, we set a new record for business volume there. And virtually all the volume supported families of modest financial means. Some people rent by choice, others by economic necessity, still others as a stepping-stone to homeownership. We want to support all these families – as well as those now pursuing homeownership – in finding the right kind of housing for them.

This balanced approach to affordable housing is what you can expect from Freddie Mac.

Conclusion

Today, the mortgage industry finds itself in a weaker condition. Since we met at this conference a year ago, two bubbles have burst wide open: In the prices people pay for housing, and in the easy credit they could obtain…sometimes to their detriment.

Few have escaped the fall-out from these events. And much work lies ahead to strengthen the financial condition of this industry…restore consumer confidence in it…and return to the underwriting principle of putting people into homes they can afford AND keep. Decisive action is very much the order of the day.

That's where the Northeast Regional comes in. It is through conferences like this that we can bring everyone together, and discuss how to begin the slow but sure process of reform and renewal. The conversation doesn't end here, of course. But here it can begin.

For 25 years, the Northeast Regional, under Bob Levy's leadership, has given us many great moments. It is time for yet another one.