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Before I begin, let me extend my appreciation to Dean Edwin Dorn, Provost Sheldon Ekland-Olsen, and Dr. Betty Sue Flowers, Director of the LBJ Library & Museum and her staff who helped put together today's program. I'd also like to thank our customers and partners here with us today who have worked with Freddie Mac to expand affordable housing for millions of American families. This evening, I am here to talk about corporate leadership in a time of change. I want to use the company I lead – Freddie Mac – as an example. I will also discuss how we have put the American dream of homeownership within reach of millions of Americans, and how we must change the way we do business to achieve the dream moving forward.
You may be wondering why you are listening to a guy with a funny Boston accent down here in Austin. It's clear to me. The Boston/Austin connection has been an important pathway to American progress over the last half century. There is an enduring relationship between our two states. Speakers – either from Texas or Massachusetts, and coming from both sides of the aisle – ran the U.S. House of Representatives for 43 of 49 years between 1940 and 1989. Having our discussion here in Texas is appropriate for another reason as well. Your state has a rich history of producing leaders who have challenged our country with bold visions – from LBJ's Great Society to George W. Bush's compassion and empowerment agenda. Lyndon Johnson was a pivotal figure in the fight to expand homeownership for the people of this nation. I have come here four decades after his presidency to talk about why his vision is still relevant to us. And I have come here to discuss the importance of this vision from my perspective as the new CEO of the nation's second-largest home mortgage corporation. In 1968, President Johnson challenged America, saying: "Surely a nation that can go to the moon can place a decent home within the reach of its families." His challenge was heard. By the spring of 1970, President Nixon and Congress agreed that the housing finance system was in need of repair. It was out of that bipartisan consensus that Freddie Mac was born. Our job, along with Fannie Mae's, was to ensure a stable supply of low-cost mortgage money – regardless of where interest rates happen to be. Since then our nation made significant progress towards meeting that challenge. In 2004, more than 68% of Americans now live in a home of their own. In other words, there are more than 72 million families who have a personal stake in the American dream. But there are still millions of Americans who are underserved by America's current home mortgage finance system. The dream has not yet become real for low-to-moderate income and minority households. Among white households, homeownership rates have reached 75%. But in underserved black and Hispanic households, less than half of families are homeowners.
President Bush has recognized the continued gap – between this dream and reality – and made significant strides trying to close it. He has proposed several, important programs – including the American Dream Downpayment Initiative – to help first-time homebuyers meet down payment and closing costs. In 2002, the President also called on the housing industry to help make homeownership a reality for another 5.5 million minority families by the end of this decade. Like LBJ, the President has embraced homeownership and understands its central importance to providing economic opportunity for all Americans. Freddie Mac shares their visions – and the view that our need for housing goes to the heart of who we are as a nation. So much of the strength and stability of American society itself rests on the foundation built by housing. If we want more communities to be communities – real communities – and not just different places with different zip codes lacking soul and social cohesion, we need housing. If we want even those in the most humble circumstances to have a chance to accumulate wealth, they must have a chance to own a home. Freddie Mac has helped more than 41 million families become homeowners since it was founded in 1970. While no one knows the need for Freddie Mac to change with the time better than I, it is also critical that we not forget how important and fundamental the positives that we have brought to the housing market. Let me briefly explain. Freddie Mac, and our sister institution Fannie Mae, were chartered by Congress as government sponsored enterprises, or GSEs. That charter stipulates that we should assist in the creation and maintenance of stable, liquid and broadly accessible markets for residential mortgage finance. We have made tremendous strides in providing stability and liquidity to the US mortgage finance system – playing a major role in helping to increase the number of American families living in their own homes. We've done this in two important ways.
First, we purchase mortgages from lenders across the country and package them into securities that can be sold to investors around the world, increasing the supply of 30-year mortgages. Mortgage providers are willing to lend for longer periods, at lower rates, because a fluctuation in interest rates will do them less harm. Risk has been transferred from homeowners to investors who bought the securities. Because of Freddie Mac's role in the secondary home mortgage market, there is more mortgage money available, increasing the overall supply of capital dedicated to mortgage lending. When I first began my banking career, Savings & Loan institutions were the nation's largest source of mortgage funding. They could only lend as much money as they attracted in customer deposits. When times were good, demand for loans outstripped growth in savings, and they would literally run out of money to lend. Today, because mortgage institutions have an inflow of funds from the sale of Freddie Mac securities, they always have money for qualified borrowers. Second, we purchase mortgages for our portfolio, using funds raised by selling bonds to investors all over the world. What this means is that liquidity and rates are further improved by the flow of funds from a vastly expanded, global pool of investors. In effect, we are "insourcing" foreign funds to finance American homes – putting capital from investors in places like Oslo and Tokyo to use for homeowners here at home – in communities like Boston and Austin. The resulting consumer confidence and financial flexibility have created enormous macro-economic benefits for the American and global economies. The housing market alone accounted for 25% percent of the increase in GDP during the last 3 years. And that doesn't include the untold billions of dollars freed for education expenses, vacations, and retirement savings by consumers' ability to refinance their mortgages as interest rates have fallen. We've given investors a relatively stable place to put their money, and we've made it easier for Americans to buy a home. The GSEs' impact has been absolutely transformational for the average American seeking to buy a home. In fact, most people in this audience probably don't even remember how things used to be. When my wife and I bought our first home in 1972, you had to go to your local bank, hat in hand, and hope for the best. You hoped you qualified. And if you did, you took the rate they gave you and said "yes sir." Today, as in the popular television commercial that shows an army of mortgage brokers waiting in line to help a young couple buy a home, you have a wide variety of options available – in terms of rates, term, points. And there is a national market, so borrowers in once underserved areas of the country – like the South and the West – are not forced to pay drastically higher rates. There's simply not a place on the planet where home buying is so successfully encouraged – with pre-payment options and long-term fixed rate mortgages – and my company, Freddie Mac is responsible for that transformation. But Freddie Mac has rested on our laurels for too long. We must now define new challenges and new approaches for future success. We must continue to change and innovate, or we will fundamentally fail in the marketplace.
In my first 100 days at the company, I found that our success has had a perverse, but not uncommon effect. It made us complacent. It led us to focus almost exclusively on finances rather than housing, causing us to lose sight of our fundamental objective of increasing homeownership. Perhaps worse, I found that we had lost the trust of some outside our company. Our hesitancy to change and difficulty in focusing on mission disheartened our supporters and gave our critics ammunition to use against us. It became clear to me that for Freddie Mac to play its central role in expanding homeownership, the company must first put its own house in order. GSEs are unique organizations; we have special privileges and special obligations. Although we are not part of the government or government-backed, we are the product of a national policy of promoting homeownership. That means we have – as a public policy instrument – special privileges, including the ability to use the capital markets to expand homeownership. But, we also have a very special obligation to keep our company financially safe and sound. And, we do all of these things for one reason and one reason alone: to fulfill our mission. If we do not fulfill this mission, we cannot fulfill our fiduciary obligation to the interests of our debt and equity investors. There are several important areas where Freddie Mac must change the way it does business if we are to succeed in meeting our mission to the American people as well as to our shareholders. Most importantly, we must elevate our commitment to our mission of expanding homeownership. While Congress chartered Freddie Mac to expand the home mortgage market, our charter also explicitly directs us to provide mortgage assistance to low- and moderate-income markets, and underserved rural and urban communities. Unfortunately, over the last several years, we have not been aggressive enough. Rather than focusing on improving housing affordability in these markets as a core part of our mission, we sometimes have viewed this as a regulatory requirement that we were forced to meet. That must change.
We must rectify this by focusing on housing and on our special obligations as a GSE, and by taking a long-term view that achieving these obligations is integral to our financial success and that of shareholders. This focus is part of a virtuous circle: if we focus on this mission, homeownership rates will rise, our finances will improve, and our shareholders will benefit. I am making Freddie Mac a mission-centric organization – so that mission is always front and center of everything we do. As part of this effort, I am communicating to our stakeholders – and particularly to our employees – the elevated importance of making housing available to more Americans. Every single day, our employees must ask whether what we are doing is helping us fulfill our mission and, if not, look for new and innovative ways to do so. While I have only been in this job for slightly more than 100 days, I believe we have begun to achieve some of the change we need to execute to steer Freddie Mac in a new direction. I want to be candid with you: we have a lot to do. Let me discuss some of the important changes we have begun to make in my first 100 days. First, we are setting benchmarks for measuring our success or failure. We have now set as a target meeting the levels of affordable lending in the single-family prime market as reported under the Home Mortgage Disclosure Act. For too long, our company has made excuses internally and externally for not meeting these goals. Our posture needs to move from trying to explain our failure to achieving success by fulfilling our mission. We may not be able to make the targets this year because of a variety of technical issues and because we do not want to meet these targets in a short-term way. We are working to develop innovative new programs that will achieve these goals for the long-term. We are also setting the strategic goal of leading the market in expanding housing opportunities for underserved groups within 5 years. This is a benchmark by which our success or failure will be able to be assessed and measured. Second, we are launching an ambitious set of initiatives to achieve these goals. Over a dozen efforts will commence immediately, with ten additional initiatives to be undertaken in the second half of the year. Continued expansion and new opportunities have been identified through 2006.
Third, we will now be compensating our managers based on mission goals as well as financial goals. Managers have always been given financial incentives to meet performance goals through their compensation. Now, for the first time, we are making mission achievement a component of this scorecard. This is only common sense; we will improve our performance by raising the stakes for managers to succeed. Fourth, we have begun to restore our financial and accounting systems. Freddie Mac lost a lot of credibility with our stakeholders because of our need to restate earnings. It is an embarrassment that we are in this situation, but we have made real progress to remedy this issue and rebuild our credibility. We are rebuilding from scratch our accounting and financial reporting systems so that Freddie Mac will lift the cloud that has obscured positive news about the company. We are making progress in getting current with our financials. We understand that getting this done in a reasonable timeframe is key to restoring our credibility with the market. Fifth, we are making important changes in the way we govern our company. We have a Board that is highly distinguished. But, as a result of new age and term limit guidelines, by year's end more than half of our Board will have turned over from what it was two years ago. All Board members and senior officers will be required to hold compensation in Freddie Mac stock, so they have a greater stake in the company's success. We have restructured our senior management by adding a new head of internal audit and new general counsel, launching a search for a new head of government affairs, and committing to split the Chairman and CEO roles. We also have adopted guidelines that fully meet the listing standards of the New York Stock Exchange – including those for Board independence – as well as SEC guidelines for audit committee independence. Sixth, we are changing the corporate culture of Freddie Mac regarding the way we manage our company. Freddie Mac is a large financial institution that was known more for its profitability than for its management excellence. I want to help make this company known for both its probity and its profitability, and these reforms will send an unmistakable signal – internally to our employees and externally to Congress and our regulators – that we mean it. At Freddie Mac, we have been slow to embrace change. For too long, we instead have fought change. As CEO, it is my responsibility to see that we learn to avoid complacency and embrace change. As company after company has learned – from AT&T to Xerox – failure to change in concert with changing times is the shortest route to irrelevance. Change is our most important imperative. Seventh, and finally, we are changing the attitude toward regulatory reform within Freddie Mac. It is critical that we not view regulatory reform as a problem, but rather as an opportunity. I have pledged to work with Congress and the administration on a reform package that will require the GSEs to operate under a set of rules that will ensure the stability and transparency of our operations. It is important that we address these issues conclusively so we can move forward and face business challenges that are even more important to our future success. This is only the beginning of the work that needs to be done, work that I expect will continue throughout my tenure. No one initiative alone will get us where we need to be for Freddie Mac to meet its strategic goal. Rather, it is the combination of many varied efforts that will produce the desired results. Under my team, day by day, we will be helping every employee of Freddie Mac learn, understand and internalize the new rules by which we play, and the new way we will now keep score. Our success in achieving these changes is vitally important to our shareholders, to communities across America, and to families looking to earn the most fundamental part of the American Dream: a home of their own.
Former Congresswoman Barbara Jordan shared that dream. Like LBJ, she was very special to this school. And she was also very special to Freddie Mac, serving as a founding member of our first public Board of Directors and a member of the Freddie Mac Foundation. She knew what it was like to struggle and still be poor, and she made bettering the lives of every American a cornerstone of her career. In speaking about our mission at Freddie Mac, she said that "we are determined to make the American Dream available to everyone willing to do whatever is necessary to attain it." I share her dream. This isn't just a job for me. It's my own personal mission. The reason that I took this job is that I believe strongly that Freddie Mac must help millions of people own a home that might otherwise never have a chance to do so. I know how important housing is, and I know how important a national housing policy can be. I grew up in a home my father was able to buy because our national housing policy thought it was important and created the VA loan. My father put all our financial resources into paying the mortgage because he felt that owning a home was the cornerstone of financial independence, and more importantly, of having a stable family. I hated it as a kid – we constantly put off vacations and owning a car – all because of his obsession with our home. But now I see he was exactly right. I understand that homeownership is the key to families establishing financial stability, and I want to help make sure every family in America can have what I had growing up. And I expect the same commitment from Freddie Mac and every employee who is part of our corporate family. I will not be satisfied until we have deeply and tangibly recommitted ourselves to our mission: to stabilize the nation's mortgage markets and expand opportunities for homeownership and affordable rental housing – particularly regarding communities that are today seriously underserved. And, I will not be satisfied until we have, through decisive, thorough and real internal change, restored public confidence and trust in the way we manage our finances and govern ourselves. It's a daunting task, and it will not be accomplished overnight. I pledge that, by the end of my tenure, Freddie Mac will be stronger, more open and more focused on our mission. And more Americans than ever will own a home. Measure Freddie Mac, and my tenure here, by that standard, and I believe you will find that we delivered.
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