Mike May's Speech to the Freddie Mac Multifamily Leadership Conference on September 16, 2009
Prepared Remarks for Mike May
Senior Vice President of Multifamily Business
Freddie Mac Multifamily Leadership Conference
Reston, VA
September 16, 2009
Yesterday, we opened our conference by looking at the big picture. What is happening in the economy and the housing markets? How are regulators managing the situation? How is Freddie Mac responding at a corporate level? From what we heard, there are three key takeaways:
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First, the economy and housing markets still have rough patches to get through. The single-family market is coping with the biggest asset devaluation since the Great Depression. Meanwhile, apartment markets are experiencing rising vacancy rates, falling property values, and maturing loans at risk
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Second, in this environment, Freddie Mac is more relevant to housing markets than ever before. We have been keeping mortgage markets afloat in single-family and multifamily, as well as implementing President Obama’s housing plan and goals.
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Third, as more people have realized that homeownership is not for everyone, the Multifamily business is more relevant to Freddie Mac and all those interested in quality, affordable housing.
That’s what we heard yesterday. Today, we are going to narrow our focus and ask: What does all this mean to the Multifamily business and for everyone here today? In doing so, we hope to get another message across. And that is: Just as Freddie Mac is more relevant to housing markets, and Multifamily is more relevant to Freddie Mac, you our customers are more relevant to us.
As we thread the needle of providing liquidity in a declining market, we are relying on you to source quality loans for us…service the loans that have fallen into trouble…and shape a future market of prosperity. That’s what we are going to talk about today.
So let me spend the next 20 minutes or so updating you on our Multifamily business: How we have performed in the past year…what initiatives we have pursued…and where do we see the business moving forward? Frank Nothaft covered a lot ground yesterday in describing the market environment. So I won’t spend a lot of time on that topic.
What I will spend time on is this question: In the worst housing market in generations, how has the Multifamily business at Freddie Mac performed?
If you know me, then you know that I like to use analogies. And when I think of our current situation, it reminds me a lot of the college basketball tournament, where the winning strategy is to “survive and advance.” Don’t worry about your point margin, just get to the next round. And then do it again and again until you cut down the nets. Just survive and advance.
That describes the Multifamily business pretty well. We are part of a corporation that is in conservatorship. We are operating in a market where near-term indicators are pointing the wrong way. And we are weighed down by an economy where the only growth sector is the unemployment line. And yet, we have stayed focused on the task immediately before us. We have been implementing our business plan of keeping this mortgage market liquid, stable and affordable, as well as investing in our future. As a result, we have been chalking up one success after another.
Amid such adversity, who is responsible for our success? Not me. Not upper management. No, the credit – the only credit – goes to a single group: The people who work for the Multifamily business at Freddie Mac. During the past year, they have put aside the external pressures and internal uncertainties…worked day in and day out to meet your needs…made our business stronger…and demonstrated class and dignity that have made me proud. So let’s hear it for the Multifamily staff!
Providing Liquidity
What, exactly, has our staff accomplished during the past year? A lot. Let me tell you.
While past sources of liquidity are still nowhere to be found, Freddie Mac has stepped up our game to be a leading source of funds. Our mortgage portfolio has climbed to $94 billion, up 75 percent in the past few years. What’s more, since Freddie Mac entered conservatorship, we have funded more than $18 billion in multifamily loans. We have been growing as much as six times faster than mortgage debt outstanding. And our share of the market is at an all-time high.
Driving our volume: Capped ARMs, seniors housing and our fast-growing Capital Markets Execution. So far this year, we have funded $1.3 billion in CME loans …conducted a billion-dollar issuance into the capital markets…and seen our pipeline of mortgages continue to grow.
Equally important: Addressing the collapse of the warehouse lending market and its impact on your business. We have reduced your dependence on warehouse lines by enhancing our expedited funding process. Here, we can fund your loans as soon as the same day that you originate them. But for some of you, even that does not solve the issue. That’s why we are in discussions now with our regulator on ways to provide additional support. We believe we can help even more.
All this explains why the first item in our business plan has been to provide liquidity to the mortgage market. Check.
Supporting Affordable Housing
Next, while few others are supporting affordable housing, Freddie Mac has financed rental housing for 270,000 families in the past year. And just about all of them live on modest financial means. While multifamily loans represent just six percent of Freddie’s overall purchase volume, they comprise almost one-third of the company’s affordable housing units. In other words, when it comes to our statutory mission, multifamily is a high-leverage business indeed: We get the most out of the least.
This year, we have supported the targeted affordable market through debt executions. As you know, Freddie Mac has exited the market for Low Income Housing Tax Credits due to our lack of corporate income. And there has been speculation about our large LIHTC position. So let me be clear: We will pursue deals only – I repeat, only – if such action helps the primary market. After all, we are here to make the housing market for low-income families stronger, not weaker.
Back to our business plan. Providing liquidity. Got that. Let’s add: Supporting affordable housing. Check.
Maintaining A High-Quality Portfolio
Next, while the market is suffering from too many loans gone bad, Freddie Mac has kept our focus on responsible lending. Indeed, our business growth has not come at the expense of loan quality.
During the current business cycle, delinquency rates have been going up for just about everyone, and that includes us. But there’s been a big difference in magnitude. For CMBS delinquencies, you need to count all the way to 400 to quantify their troubled multifamily loans in basis points. Meanwhile, at Freddie Mac, our multifamily delinquencies, also measured in basis points, are just 11.
Our better quality book of business reflects a few things:
- One, when the market went on an underwriting bender a few years ago, we were seen as the conservative teetotaler.
- Two, when the apartment market began to decline late last year, we painted a clear credit box for you to operate in. A bulls-eye, if you will.
- Three, we continued to focus on having a quality correspondent network in each one of you, and you have produced quality loans throughout.
Combined, these actions have made our liquidity sustainable when the market was good to now when it is bad. That is not to say we do not have delinquencies to manage. Obviously, we do. No matter how good the underwriting, some loans ultimately will fall victim to the economic recession and apartment downturn. And we need to be prepared. That is why we have set aside $330 million to cover any future losses…added staff in the loss-mitigation area…and added resources to our Asset Management team, who are modifying or refinancing loans where possible, and disposing of REO assets when needed.
Preserving apartment values. Stabilizing neighborhoods. That is our approach. That is why we are taking aggressive action. And we want you to do the same. In the weeks and months ahead, we will be requiring more financial information and more due diligence from your organizations. And we will need them done on a more frequent basis. So when you return to your companies, know that a top priority is to deploy more resources in this vital area. If both of us do our jobs right, then together we can keep troubled loans to an absolute minimum.
Encouraging responsible lending. Partnering with you to ensure high-quality asset management. Check and check. So how is our business plan adding up? Well, we have continued to fund your loans, support affordable housing, and manage our book better than many others. We have done all this by working with our regulator and our customers. Together, we have survived and advanced to the next round. And we are not going there unprepared.
A Look Ahead to 2010
In fact, 2010 will be much of the same: Execute the business plan well and prepare for the future. So let me spend the rest of my time on the future. As Frank Nothaft mentioned yesterday, unemployment is likely to remain high for some time. This will directly affect vacancy rates, property values, loan delinquencies and new originations.
Throughout this business cycle, we have served as a reliable outlet for your loans. And that will not change. As we look ahead, our purchase volumes likely will be lower…our credit box will remain tight…and our pricing will move higher, reflecting higher capital costs at Freddie. But we will maintain our relevance in the market through our liquidity, support of affordable housing, and the stabilizing impact we have on this market.
What will be new? We will expand and strengthen our business in several important ways. With regulatory approval, we will continue to add new products that meet more of your needs.
For example, to penetrate an emerging segment, we will launch a green initiative. Here, we will support energy-efficient retrofits of aging housing stock. The idea is that such retrofits might produce cost savings down the road, which could be reflected in pricing and credit terms up front. Now, we just need to prove out this theory. So we will begin by conducting a pilot program. But if the results are favorable, we hope to formalize a green program for all Freddie Mac customers.
Preserving housing stock is a great byproduct of green initiatives. And preservation is critical to something else: A new legislative responsibility for Freddie Mac called Duty to Serve. Here, Congress is asking the GSEs to help preserve and improve housing stock that is affordable to low-income families.
This is an expanded role for us, and the specifics are still being fleshed out with our regulator. But you can be sure that will we be more active in areas such as manufactured housing communities…coordinating more with local, state and federal programs…and attracting more capital to the market for Low Income Housing Tax Credits.
As we support a broader set of needs, we also will be investing in our future by strengthening our business infrastructure. In the current environment, we are focused on ensuring that our asset management function has all the resources and capabilities needed to work through troubled loans. And that remains our number one priority.
However, our investments will not stop there. In the year ahead, we will be building even more capabilities into our Origination, Underwriting and Servicing system. One that eliminates steps and hand-offs…creates flexibility to process a wider variety of deals…allows you to more easily track the progress of your loans…and provides us with metrics to drive internal improvements. In short, these investments will modernize our platform to achieve scale and efficiency. To underscore their importance, all of this work is part of the corporate scorecard at Freddie Mac. So we have an entire company behind us on this one.
Still, a technology platform without the right financing tools is much like vapor ware: Sounds good, does nothing. And that is why we will continue to build out multiple execution paths for your loans. Currently, we rely on our retained portfolio and CME to finance your loans. And these execution paths give you options. If you value flexibility over price, then our portfolio option is for you. If, however, you favor price over flexibility, then CME works best.
Looking ahead, we plan to develop a middle solution, based on securitization, that better balances price and flexibility, and gives us yet one more way to fund your loans. In fact, we will be able to fund an even broader range of them. Think of our approach as a three-legged stool – retained portfolio, CME, a new securitization option – that offers different value propositions based on different customer needs…manages Freddie Mac’s capital in the most efficient manner…and enables us to compete against, well, anyone.
Conclusion
And the future is very much on our minds. With the approach we are taking – providing liquidity…supporting affordable housing…managing our credit exposure – we have been able to meet many customer needs. Success here is critical to helping your business survive this dramatic downturn. Success also is critical to helping our company contribute to a broader recovery in housing markets and the economy.
But our initiatives also do something else for us. Expanding our role in the market. Modernizing our technology. Diversifying our financing vehicles. Together, they will help us prepare for the future of Freddie Mac and for the market. And that durability is just as critical to you.
In recent years, the Multifamily business line has been a great story at the company. We have been the most consistent contributor of net income. We have financed a growing share of affordable housing units. And we entered this business cycle at low levels of credit and maturity risk. Put all that together, and it is clear we will be ready for whatever the future holds.
After all, this is very much a market we want to remain in. Whether you look at demographic trends that will create more renters…the lack of over-building that will lead to more new construction…or public policy goals to better support rental housing, all of them say the same thing: In the years ahead, the multifamily market will be the place to be. That is exactly where you will find the Freddie Mac staff. And we want to see each and every one of you there with us.
Thanks for a great year under rough circumstances. Let’s keep our momentum going strong!