Cliff's Notes on Housing Finance
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Welcome to Inside Economics. I'm Mark Sandy, the Chief Economist of Moody's Analytics, and I'm joined by my two trusty co-hosts, Marissa DiNatale, Chris Dorides. Hi, guys. Hi, Mark. Hi, Mark. You see how I got that introduction down pat? It's perfect. Flawless. Flawless. Flawless. Even the timing couldn't have been better. Yeah. So how are things? I know this is early in the week. We generally record later in the week because we have a guest, a special guest. I'll introduce...

him in just a second. But how are things? How was your weekend? How was Memorial Day? Chris?

It was nice. It was. Yeah. Relaxing. Yeah. Yeah. What do you do at the Reedy's household on Memorial Day? There's no bocce, but there's- Oh, I've always wondered how you pronounce that. Bocce. Bocce. Oh, I love that. Bocce. There's no bocce. Bocce. What's that? Is that the Philadelphia version of bocce? Bocce? Bocce? What'd you say? Say it again? Bocce. Bocce. I love that. But- I could say that all day long. Bocce. Bocce. Bocce.

- We went to a nature preserve. - Oh. - We took a little walk. - Hey, have you ever been to Longwood Gardens?

I have many times. Many times. Okay. Yeah. That's a gem of the region. That's definitely a gem. Definitely a gem. Yeah. Gone there many, many years. And Marissa, how was your Memorial Day weekend? Nice. Yeah. Didn't travel. Stayed around. Beating anyone else at the pickleball? Yeah. Played pickleball. It was also my brother-in-law's birthday. So we did a pickleball barbecue tournament on Sunday. Did you win? Yeah.

No. Did you win any games? No. But you still have the win from last week. I do. I'll hang on to that till the day I die. Yes. I have that one win under my belt, but no, it was fun. It was a nice weekend, hung out. Yeah. So on the pickleball thing, do you think you have promise or are you like,

No. There doesn't seem to be much promise right now. I think I need to...

I think I really need to take lessons, you know? Doing what I'm doing isn't exactly improving my game. Right, right. Did you ever play tennis before the... No, no. I have, like, no tennis background, no. And, you know, I usually play singles, and this weekend we played doubles, which is how it's usually played, right? And it's a very different experience playing doubles and singles. So it was a little getting used to... And playing outside, too, I...

Also don't usually play outside. So you got the wind factor and the courts different. Oh my gosh. Yeah. That was complicated. Yeah. It was fun. When you play bocce, how do you say it, Chris? Bocce? Yeah. Bocce. Bocce. Bocce. If I say, when you play bocce, the whole wind thing is not an issue, my understanding. I've never played bocce. Oh, that's a common misconception. Really? There are all sorts of factors. Oh.

The ground was uneven spot in the ground. Oh, that I understand. Yeah. A little pebble here, a pebble there. When you're at that professional league. A little cork from the vino. The vino, the cork gets on the boat. How do you say it again? Boche. Yes. Every factor. I guess we should get on to the topic at hand. We got a guest.

Welcome, Cliff Rossi. Cliff, how are you? I'm well, and thanks for inviting me, Mark. Yeah, thanks for coming on. Cliff, I know you from the University of Maryland. And CERC, what does CERC stand for? Smith Enterprise Risk Consortium. Oh, cool. Yeah. Yeah, it's very cool. But you've got a very storied kind of history and background. Do you want to give the listener a sense of who you are?

is one word, I guess you could call it. Do you play Bucci? How do you say it, Chris? Well, down where I live, we call it Bocci, but clearly I have a misnomer. See? I'm totally with you. Bocci I can get. This whole Bucci thing. Perfectly fine. Exactly. It's all good. It's all good. Yeah, no, I'm...

My soundbite is I may, if I can still say this after about 17, 18 years, I'm still recovering chief risk officer masquerading as an academic these days. My trail of tears, as I like to call it, started off back during the last financial crisis before last. So if you want to go back as far as the S&L crisis, I was...

with the Thrift Regulatory Agency and then U.S. Treasury. I was actually one of the people that was credited with tallying up how much the cost of the SNL crisis was actually. Were you at the OTS? I was. Office of Thrift Supervision. You were?

Was Ellen Seidman there at that time? She was, exactly. Yes, you probably know a bunch of these people that we worked with at the time, absolutely. And then from there, I moved on to Fannie Mae.

for a stint. And then I was at Freddie Mac for about eight years in various capacities. I think the first role I had there, I was on the first team that built the industry's first automated underwriting system, Loan Prospector. And I built the first FHA and VA automated underwriting scorecards myself that we had at Freddie Mac. And then went on to do a bunch of other things, including heading up mortgage credit policies. I like to tell people,

I left Freddie Mac at the end of 2003 when things were really tight from a credit standpoint. And then things fell off the rails thereafter, as we know. And then I went to the dark side. So became the chief risk officer of a bank you may have heard of before, Countrywide.

became the chief credit officer of another small place. Was that in 2003? You went from... I went to, yeah, I went to, yeah. Don't ask me about my job hunting skills. But yeah, I went to a countrywide bank. I should make that statement. The bank got me a parent as their chief risk officer. And then in late 07, I went on to Washington Mutual.

and became the chief credit officer there. I was the fourth chief credit officer in a two and a half year period of time. I should have known better, but didn't at the time. Tells you something about the job hunting market is all about asymmetric information on both sides. But anyway, and then I wound up as the managing director and chief risk officer for, I hit the trifecta at Citigroup.

heading up the risk side of consumer lending, including the $300 billion at the time mortgage portfolio and had to deal with the aftermath of that. So by the time I was, let's just say by 2009, I was completely burnt out from everything and decided, you know, life is short. And I had been an adjunct actually for,

at the Smith School of Business for, gosh, my entire tenure at Freddie Mac. And then I went ahead and they caught me in a moment of weakness. No, I'm teasing. Said, hey, you know, we could certainly use a guy like you around here whenever you're interested in coming down. And I did. And so I've been with the university. It's been my longest tenure anywhere. I can't believe it. Going on to my 17th year starting this year. And

And it's been a great experience, totally different from an industry role. But as you mentioned earlier, this last couple of years, being the director of our Smith Enterprise Risk Consortium has kind of taken me back to my roots.

trying to get folks engaged as risk practitioners, as a community, kind of to better understand, bring up our skill levels and our understanding and awareness of risks, trade, you know, ideas and practices that can help us better enhance what we do about managing risk. And that goes for, you know, we, unlike other associations, we actually are, you know,

Not just one sector focus, for example. We include banking and insurance and reinsurance and pharma and we've got aerospace and many others involved. So it's been it's been a great community and we we hope to continue continue doing what we do.

Yeah, I guess I should disclose I'm on your board of advisors. Yeah. Yes, our advisory council, I should say. Absolutely. And thank you very much. And Chris has been a keynote for an event or two of ours and has been wildly acclaimed at that. So it's been awesome. Did you guys...

overlap at Fannie or that maybe you were before Chris's time? I'm probably way older, so I don't think so. I was in the early 90s. I think maybe Chris had just been born or something. Yeah. Yeah, it could have been. But the interesting... Cirque is obviously...

you're deep into the housing finance system and mortgage risk, but Circa is much more than that, right? It's about all types of risks that the businesses face. Yeah, absolutely. We put them into three buckets, basically. Of course, financial risk, right? So anything asset liability management, so the interest rate risk market, liquidity risk, credit risk, if you want to kind of put it there as well. And then the non-financial risk, right? Operational risk,

supply chain rest. So we spent a fair amount of time with

manufacturing companies. In fact, on the pharma side, oddly enough, I got involved quite heavily in pharmaceutical risk management several years ago when I was doing a couple of research studies for the FDA and helping build out an enterprise risk management framework for their office of pharmaceutical quality. So we got really involved with that. And then on the non-traditional risk side, right? So it's the cyber risk, AI risk, and climate risk.

risk. And we've been spending a fair amount of time on the climate risk side, particularly as you probably are well, well, well, well versed in this dealing with you know, issues relating to the homeowners insurance and the potential emerging threats that that creates on. Yeah. We should come back to that. Yeah. That's, that's when I've put together a proposal for,

on that one. They're starting to get some traction actually in the halls of Congress and elsewhere. At least they're interested in hearing more about it, let's just say so. Well, certainly homeowners insurance is a real problem in many parts of the country. Big time. Big time. I saw a statistic that I think almost 10% of homeowners insurance

Yeah. Yeah.

homeowners insurance premiums and some of those things. And they have a nice little Excel database that you can kind of go through that's at the zip code level. And what was astonishing to me was that, you know, there were some zips that had that the average annual homeowners insurance premium was over $20,000 a year. Wow.

Now, these are in the higher end areas, right? So I think Palm Beach area was like somewhere about 40 or something, you know, but but you think about that and you've heard the horror stories. You know, somebody has a five thousand dollar a year premium that goes to twenty thousand dollars next year. So, yeah, this is, you know, the canary in the coal mine are certainly these areas that are in these coastal areas or wildfire prone areas and whatnot. But it's it's coming to a theater near you if we're not careful. So.

and there aren't very many solutions that's the thing that's that you see there's a lot of band-aid or very kind of like peripheral kind of oh well you know cat bonds are going to save us and no that's not going to save us or you know any of these other kind of parametric insurance isn't going to save us but uh but anyway that's that's that's definitely a topic for another time well actually we're here i'm curious you said you have a proposal that's making some progress uh in yeah i do um

So the proposal is to take a page from the topic of today around privatization of the GSEs. By the way, I don't like that word privatization, but that's a whole different story. I don't like that. That's a good point. I don't like that word either, and it gets thrown about too carelessly because – Yeah, exactly. Okay, we'll definitely come back to that. So we'll agree that we will not use that word privatization here. But the idea is –

basic ideas to say that, look, current insurance markets are not functioning adequately. And again, you have to buy into the whole premise that this is that that that perhaps there is some sort of market failure that has occurred. We can debate sort of what the nature of that is. But effectively, somebody isn't able to take on that

catastrophic risk as effectively as they might otherwise in the pricing of these markets. So insurance companies, right, are facing significantly higher reinsurance premiums when they try to offload some of that risk. And that comes back onto them. And then they decide, you know, with 50 different state insurance commissions, you know,

you know, with all different sort of agendas. Some are willing to go with rate hikes and some are not. Well, then what's an insurance company to do on top of all the other things that are pressing on them but to

either tend to withdraw or in some of those markets and not underwrite new policies or to basically, you know, go and have to price up. And so the proposal as it would work is that there would be a, and again, it would take a congressional effort to do this, but would be to charter a new GSE that would

Perform that function, basically think of it this way, and I actually talk about it in this paper was in the National Mortgage Professional magazine and maybe mortgage banking magazine as well. And it basically it would.

The way I'm thinking of it, it was take the NFIP, so the National Flood Insurance Program, and use that as kind of like the base model. Take that, pull that out of FEMA, because we know NFIP hasn't exactly been, you know, great at what they do.

pull that out of FEMA, create it as a standalone GSE, and then build that focus on the flood part of it. And then over a three to five year period of time, then start to build on the other components. So the idea would be this. Each homeowner would have two policies. They would have what I call a standard homeowner's insurance policy for things like trip and fall, theft, those kinds of things. You know, water damage, leaks in their home, that kind of thing.

That's pretty easy to price from an insurance standpoint and would continue on and no problem. And the insurance companies would underwrite that and everything else. The other policy would be a natural hazard policy, and it would be priced according to the area you live in, what natural hazards are most prominent and how that would be priced, but basically using a cat model of some sort.

And on the back end, and here's where the fun begins. So instead of the NFIP as it is today, absorbing all that risk, taking a page out of what the GSEs do today for credit risk transfer securities, we create a natural hazard risk transfer security and would push that out the back end and the natural buyers of those, right? Because you think about an insurance company or reinsurance company,

today struggles with how to price that risk, right? They've seen what's happened just in the last few years. Is that going to be a harbinger of the next few years? Who knows? And so they have a harder time with that. But if they could buy tranches,

of these risk transfer securities and say, well, you know what? If I'm an insurance company, I'm gonna take the first or mezzanine loss of this position because now I can now see that's what I want. And they can replace that business that they, you know, 'cause I was thinking at the beginning, if I'm an insurance company, I'd say, well, wait a second here, you're taking all my business away. This GSE is gonna gobble it all up.

I'm like, no, not so much. What they're going to do is they're going to repackage it and sell you that swath of risk that you want. Exactly. And the same for the reinsurance company. They'll step out a little bit further out in the risk spectrum to take that risk.

And then the cat risk would be held, presumably by this National, you know, Hazard and Shrinkage Corporation. Again, with all the issues that we face today on the housing GSEs, right? So, you know, what kind of guarantee are we talking about? And what's the mission? And all these other years attended the capitalization of this. All of that still sits. But I'll just say this. Does that GSE have an explicit government guarantee? No.

Well, again, I left that a little open. That's beyond my pay grade. But some sort of, I think, backstop has to be there. For the very reason that you and Jim cite about the implicit guarantee associated with Fannie and Freddie. I mean, at the end of the day, if we're really going to go down this path,

you can disrupt things pretty significantly if you mess around with that guarantee. Pretty cool idea. Chris, I know, Chris, you've been thinking about this. What do you think of that idea? Are you thinking of this as a- You can be rude. You can be just don't- Yeah, yeah, I can take it. I've heard worse. Chris is so polite, you know? I actually do like it. Can I not like it? Oh, okay. Wow. Okay, there you go. Wow, you made my day. Are you thinking of all perils?

I'm thinking all perils. Yeah. Okay. Because that's been a big complaint of consumers, right? You had these people who, no, they didn't have flood insurance. They weren't required to have flood insurance. And then the big storm came.

Exactly. And one of the things that I also think about are the incentives, right? And so the classic one from Flaught is that, well, wait a second, how would this operate? And are we going to incent people that have a place on the outer banks that's built on stilts and it gets wiped out year after year, they get to rebuild? And the answer to that is no, we would have policies in place that would limit that sort of thing. But there's a lot of devils in the details about something like this. But fundamentally,

Something's going to have to give in the marketplace because it is, as you all know better than I, it's going to or is already having implications on market valuations of properties in these markets and the demographics and just all sorts of things. And so what I was trying to get out of this proposal was to have a conversation about

we need to stop nibbling at the edges of this because anytime I've read any, any, any, any pieces on, on homeowner's insurance, it's always about, you know, 99% of the, of the articles about, about the problem. And, and at the end, when they get the end, there's not a lot of solution. Right. And it's like, we need a, we need some, you know, something big has got to come out of this, whether it's this proposal or something else, we've got to really kind of

rethink the way homeowner's insurance is done. Well, one way to think about it is if we don't do something like this, then taxpayers are going to be on the hook ultimately anyway, right? Yeah, exactly. Because the insurance industry is going to collapse at some point and who's going to be on the hook? Precisely. This way, you actually...

you know, the taxpayers backstop, but presumably the GSE would pay a fee for that service. And so taxpayers would actually get paid for. Yes. Shouldering that burden in a rational way. So, yeah. Yeah. And then the transfers of a lot of that, you know, instead of keeping it completely. To the private investors, you know. There's that private, public kind of thing, you know, going on. So, yeah. Yeah. And that gets to the current GSEs and the,

fannie and freddie but you know you're transferring the ultimately at the end of the day if they transfer the risk through the risk transfer process the private sector private investors are actually taking the risk not the taxpayer so that's correct um okay i got i got a uh we'll see how good you are cliff uh which state has the highest homeowner insurance rate in the country i'm hoping you know the answer to that question chris i think i know but i

You can chat GPT if you need to. Yeah. I'm going to take a wag on this one. What's a wag? Is that like a Baltimore thing? It's a wild ass guess. Oh. That's a technical risk term. I should have known that. That's funny. Highest homeowner's insurance rate. Yeah. It's a little surprising, I think.

Well, I would have said Florida, but now what you said is probably taking me out of that game. Nebraska. Oh, I think he got it. Oh, my gosh. What a wag.

That is a great wag. It sounds like it was an informed guess. I don't think it was a wag. It's an IG. It's an IG, not a wag. I think it has to do, I could be wrong on this aspect of it, but Nebraska because of convective storms and things like that. Exactly. Wow. You are good. You could be on our statistics game any time. Which state has the lowest statistics?

And this may be changing. This may be changing. It may have already changed. I don't know. I probably shoot. That's a tough one. Give us an egg. Give us an answer. Vermont. That's probably a good one. I, it used to be Hawaii, right? Oh,

Hawaii has the lowest. Yeah, it did. It did. I think Vermont might be moving in that category. Yeah, because of the fires. The Lahani fires. Yeah, I've heard that if there's any place that you want to relocate to to avoid natural hazards, it's Vermont. Vermont. That makes sense. Yeah. Yeah.

Interesting. It's cold, isn't it? In Vermont. Someone told me the next 20 years. Not so much. It's the new North Carolina. Exactly. I got a good friend of mine who's a climate scientist and we went pretty closely on some of these things and he's from Buffalo and he goes, you know, he says, that's going to be the place to live. No, not so much, but anyway. Well, let's, let's turn to Thaney and Freddie and let me just frame it a little bit for the listener.

as best I can. So obviously Fannie and Freddie, the GSEs that are key to the housing finance system, they account for, correct me if I'm wrong, but probably about 40, 50% typically of all mortgages that are originated, you know, kind of middle income households generally, kind of bread and butter mortgages, 30 or fixed. They account

obviously failed in the financial crisis back in 2008 and have been in government, so-called government conservatorship ever since. So under government control. And in fact, I think it, I think it may be the last thing that's unresolved from the financial crisis. I mean, there was a lot to disentangle there, but I think it's the last thing to kind of resolve. Yeah.

And there's been more interest in this recently about what to do about Fannie Mae and Freddie Mac. You know, should should they stay in conservatorship? Should they come out if they come out? How should they come out? So forth and so on.

And this gets to the question of, I don't like the word privatization because in my view, they've been effectively privatized through the risk transfer process. I'd say it's a release. We're talking about a release of the GSA conservatorship. A recap, yeah. And so this has taken on more interest because you've got a number of investors in the shares of Fannie and Freddie that obviously are very interested in release because that would increase the value of their holdings.

But there's also a lot of interest in the administration around this as well about taking them private. And there's been some conversations, important tweets and social media posts that have suggested that that's the path the administration wants to take. So with that as a frame, how do you think about this, Cliff? What do you...

So how do you think about whether this is a good idea, a bad idea, what it means for the mortgage industry and the mortgage finance system for homeowners? Just an open-ended question, wherever you want to take that. Yeah. Well, again, whether or not I was lucky enough or unlucky enough to be at both companies, I work from that lens.

And can tell you certainly in toward the end of my tenure with with with one of them, Freddie Mac, I could see. And then on the other side. Right. So on the other side, I was I was working for companies that were selling lots and lots of loans to both of these entities. And I come back to it from from the standpoint of, OK,

Both agencies worked exceptionally well for, what, 80 plus years before the 08 crisis came along. You have to ask yourself, what caused that? Probably a conversation for another time. But I would go all the way back to the 2003 period and say what I think really kind of precipitated things, and this is going to sound odd, is when the accounting scandals broke for both of them.

And the reason why I say that is that, again, at that time I was at Freddie Mac and Freddie had a very strong risk philosophy at the time that, you know,

We are going to do whatever it takes to preserve and protect that franchise. So during my tenure, and I was head of mortgage credit policy toward the end of that, we were definitely given the marching orders to keep credit very, very strict.

In fact, I was involved with setting up the first, I don't know if you remember this, back in those days, the first major market share agreements. We went after Wells and set up a dead of night almost. We all met in the airport, Chicago airport, whatever the big hotel is there, and got together and we put that 100% market share agreement together.

And that's to say that when you fundamentally, you have a duopoly, a regulated duopoly, and I'm not averse to kind of releasing them from their captivity of conservatorship because I think that brings certain

other things, right? You get this regulatory kind of whipsawing that can go on from time to time where you get one administration in and it goes one direction and another one comes in and it goes another direction. And that kind of creates some instabilities in the marketplace. And you can look at things like the LLPAs, right? The loan level pricing adjustment changes that were made and all sorts of things that went on there that created some issues back in the day.

What I would say is this. When you fundamentally look at those two companies and you're thinking about releasing them from what they've been under in conservatorship, I think about, well, how do they compete? Well, they compete on really three things. They compete on service, they compete on product, and they compete on price slash credit.

Well, in a world where the common securitization platform has come along and you've got no difference in the securities, you don't have a Freddie Mac participation certificate anymore or an MBS over here for Fannie Mae. You got them completely aligned. They're issuing the same thing.

In a world where the products themselves are virtually identical, single family, multifamily products are pretty much the same. In a world where service is pretty much the same, if you want to call service things like their automated underwriting systems, their automated valuation, collateral valuation systems, all the other associated apparatus that goes along with this, that's all pretty much the same. So what's left? Well,

Price slash guarantee fee, that is, and credit. That is the underwriting. And I saw that up close and personal that in a world where you had weak regulation, weak regulator, a insufficient capital and large portfolios.

It didn't take long for these companies to start to toward the tail end of that right. 05, 06 and 07 in particular start to move into. I remember back in my time when we were first presented with what we need to compete with Fannie Mae's expanded approved product. And I'm going, why in the heck would we do that? Right. Why would we go down this path? This is terrible, right? We can't understand that product. Well, those kinds of things come to mind and I go, well, if we're going to do anything,

I think we need to start if this is a perfect opportunity for the administration to sit back and say, what do we want our secondary market to look like, our mortgage secondary market to look like? You don't get too many opportunities like this to get it right. We want to have a strong regulator is the first thing. We want to have somebody who gives strong oversight to that. Not a regulator that's unbiased.

too strong right because i think i think you know it's just it's kind of like the goldilocks thing is it too don't want it too hot too cold you know when you see it but on top of that i i i i really question why we even need two at this point i know there have been proposals over the years to say well maybe we need five maybe we need three whatever it is maybe we need to have two of them again going forward but i really question why why we need two at all because at the end of the day that that

That competition that is there. I mean, I personally have seen, you know, times where back in my time, CEOs that I worked for were beating down the guarantee fees at one of the other GSEs in order to get a major market share agreement from them.

And totally underpricing that credit risk that ultimately those GSEs were taking. So I do wonder if keeping them, you know, recap and releasing them as they are today makes sense. I also worry, and I think this resonates totally with the piece that you wrote, Mark, a while back here with Jim, that that.

If privatization, if that word is used and people say, well, that comes with no government guarantee, I think that's a complete non-starter, complete non-starter. I don't know how you can have the size of the marketplace that we have today for mortgages, the fixed rate 30-year mortgage, all those things that we've come to see and believe in.

without some form of government guarantee. And I would simply fire advising folks in Treasury or FHFA, whoever else is involved with us, I would say, and I think you've heard Besson even say this, like, we're not going to do anything that's going to, we're going to look at mortgage rates, we're going to look at these things before we make a move. And I think you have to be very thoughtful about that before you touch it. Because once you do,

Given the size of the marketplace, it would have such a disruptive effect on the economy. It would be worse than doing nothing at all. So those are kind of some of my big thoughts about that. So let's unpack that a little bit or a lot. So going back there in conservatorship, the question is.

release into so that they become private entities, private financial institutions with some form of backstop from the federal government, because without some form of backstop,

the nature of what they do will change completely. They won't be able to issue 30-year or long-term fixed rate prepayable mortgages. That'll become a shadow of what it is today. And if the goal here is to continue to make sure that that's the kind of the mainstay of the mortgage finance system, you have to have some kind of backstop. So if you go down the release path, like is being discussed,

That has to be part of the equation in some form or another. That seems to be one thing that you're saying. Without that, it doesn't work. Rates will be a lot higher for 30-year fixed, 15-year fixed. It just won't work. Okay.

The second thing you're saying then is, okay, if we release them, let's think about what the system should look like in that release. And you are advocating, arguing we should have one GSE, maybe some merger, some combination of these Fannie and Freddie into one entity. And the reason you're arguing that is – and by the way, let me preface it by saying that

I was kind of where you were, you know, 10 years ago on this. We need one. In fact, if you go back to the papers that I wrote with Jim Parrott, we advocated for one. Then I had this long conversation with Don Layton, you know, the former CEO of Freddie. Was he your boss at one point? No, he wasn't. Oh, he was in conservatorship. He was in conservatorship. And he made the point, a couple points. One, he says, trying to combine these guys because they're two largest, close to the two largest financial institution on the planet, and

Good luck with that. That's going to be really hard to do. Second thing he said that, though, resonated with me was it's not bad to have competition. You need a little bit of – you need that competition. Otherwise, they lose the focus on service, and there's less innovation. Freddie has – and you know this better than I. I'm just –

parroting what I heard that Freddie has a different culture, different perspective than Fannie. And it's not bad to have those two different perspectives that the, the, the two having both those perspectives lands us in a better place. That, that, that, that's, that doesn't resonate with you. Not at all. Not at all. Not at all. I, I would, I would on, on both of those things. I, I would, I, first of all, I'd say I, yeah, they may have different cultures, but again, I,

Who would have thought we would have been able to have eliminated having two different securities for each, that there would be a common securitization platform or common security, right? That was a heavy lift and they accomplished that. And again, I come back to, and cultures are cultures, right? How many banks have we seen over time, you know, that have merged in with other organizations that are, you know, with investment banks and banks together? So I'm not a buyer on that. And the last thing on the competition side, right?

I think they ought to be a financial market utility, flat out a financial market utility. At the end of the day, there were too many...

the competition got too fierce. Let's just say, uh, when you competed to the bottom and then you're back to the bottom and back to back to my argument that they, that they don't have much to compete on other than price and credit. And you don't want that. And then they, and they did well, and it was compounded right against some of that. You wonder how much of that would have happened actually, if Ofeo, if we'd had FHFA instead of Ofeo, Ofeo was pretty weak regulator. Um, but at the end of the day, uh,

I'm not a...

I thought along, I, I would, I think 10 years ago I was, I had written pieces where I think I was at, uh, maybe we should have five and we should have more competition. And then I, you know, maybe I was always on two. I was on one, then two. And then they, I got forced into five because I thought maybe we could get that done. But you know, I always, I always thought two was right now. Chris, do you have a view on this, on this particular part of the debate? Well, first of all, do you hear anything from, from cliff that you would take umbrage with?

No, I think we have shared lived experience, right? So a lot of the things he was talking about. So you want one? You want one massive? One utility. I mean, when I think about that. That's going to be like a, what, a $7 trillion financial institution? No? But they're acting like a utility, right? They're not actually. Okay. In my view, they are. Yeah. They're,

They're the transformer, right? They're providing the liquidity to the lenders and not the backend. They're laying off as much of the risk- They're just an intermediary of risk. They take the interest rate risk, they funnel it through, they take the credit risk, they funnel it through. So why do... It's not... When you say 7 trillion, that's overstating the complexity that what's involved here. That's right. I think so. And it's the economies of scale that we're after here, right? Maybe I'll go back to one. Okay. Yeah. Well, and here's another thing to think about.

The beauty about these two institutions, they are set up almost identically, right? They have a very huge single family division. They have a multifamily division. They have an investments and capital markets division. The consolidation is actually from that standpoint is pretty straightforward. It's not like they have, you know, bringing a Citigroup in with a JP Morgan and trying to put all that, those pieces together would be really, really tough. But you're talking about really only three divisions here.

And they're all the same. I mean, so, and, you know, and the current administration would, I would think would like that because they're looking for economies of scale and things of that nature. And in fact, there you have the FHFA director now heading up the boards of both, both these companies. That's when I heard that, when I heard that statement, I thought, hmm, I wonder if there isn't something more than this. They're thinking along those lines. I don't know. Yeah. Well, I was going to say, I saw those side deals as well. I was going to say the lenders were playing the two off of each other

Like an art form. They knew perfectly. I saw these one G-Feed details going through. I guess it depends on your perspective. That was argued to be a feature, not a bug. Because you got better service. You got competition. That's a good thing. You end up with a better product at a lower price. Well, if it was the service, they were just... But the service, that was pretty comparable across the two. They were really competing on price, right? And they were undercutting the G-Fees.

to the point in some cases where- - Well, if you have a strong regulator and you're regulating price, then they gotta compete on other things. They gotta innovate, they gotta come up with different ways of... Well, anyway, the other thing that Don said, which I found was interesting, maybe doesn't matter anymore in the current context,

He said politically doing that would be forget about it. Yeah, I agree with that. Yeah. In this environment, no chance. Yeah, it'd be a tough one. Just simply because you're making an even larger entity backstop. Well, he was making the case that you're going to fire all these people. So that's why I said maybe in the current context, it's easier. Right. Yeah, probably in this context. I was thinking less about that than I was just if you have to do anything –

with Congress, right? If this couldn't be done administratively, then nothing's going to happen on that one. But I think if you were the housing czar for a day, I was, that's the road I would take. I would combine them. I would wring out the inefficiencies that they tout that they want to get rid of to begin with. And I would remake this into a financial market utility

Kind of a Ginnie Mae like there have been discussions in the past about maybe some of the some of the the structure of what we have could be made more like a Ginnie Mae with the investor credit investors over over in a different world. But just to kind of keep things clean, I would just kind of combine the two for all the reasons that I said earlier, I think.

you know, again, as I mentioned before, it's, it's, it's hard to imagine what it would have looked like if FHA had FHFA had been in place. But I also know that even with FHFA, um, they take their marching orders from the administration. And from that standpoint, things could be, it could still have been not, not too dissimilar from the outcome that we saw in a way too. So, uh,

I think the competition thing really bothers me a lot and has over time for reasons that, you know, Chris has mentioned before that they, you know, we see them compete on price a lot. And that has to be solved for, I think, in the next round. But I am not, I can't imagine that they would move these two companies out of conservatorship without having some backstop.

And at least an implicit backstop. I know they say, oh, well, you know, they've got this much larger line of credit from the Treasury than they've ever had and all this and the $2.5 billion they had originally. But I'm like, I'm not a buyer because the market's not going to buy that. You know, and the rating agencies, when they start rating the debt, they're going to say, wait a second, on a standalone basis, not so much. So that's kind of where I come down on that. Well, just for the record, I –

Unless there's legislation, I'd like them exactly where they are. Just keep them there because otherwise it's going to be a bit of a mess. But I'm going to ask you an unfair question. All the questions I've asked so far are fair. The unfair question is, what is the probability that there will actually be some form of release in the next couple, three years? You know, if you had asked me that question, what, a week and a half ago or whenever Trump came out with his statement? Yeah.

I just said very low probability. I just said maybe in the 25% or less category, only because they've got way other things going on right now that they need to deal with. But when he came out with that statement, I was a little taken aback because I thought, well, this sounds like this could actually that they haven't put that away, put that to bed. They're actually going to maybe think about doing something.

And so I would put a probability in the next several years, I would say better than 50%. And we may get a signal within the next couple. I think they're going to at least try to do something. Oh, yeah, I think they'll try. But maybe cooler heads will prevail and

we'll say yeah you know maybe behind the scenes treasury saying yeah that's a big risk you don't want to take right now so but christian that's higher than 50 percent from i don't know what do you say man what do you say he's always going to be higher than it was a few weeks ago but i i still hello like so daunting and it is daunting

But does that mean that they're not going to take that on? I mean, they've done a lot of things that I would otherwise not have thought they would have done quickly. And so, right. That's, you know, move fast and break things kind of a mentality. So Chris, you want to put a number on it?

I'd say 25, 30%. 25, 30. Marissa, do you have a view on this one? This might be a little esoteric for you. No, I don't think. Yeah. I don't think I do. Yeah. I'll split the difference between you guys. I'd say 40%. Okay. All right. That's definitely...

they're going to take a crack at it, over even. But my sense is that they're going to figure out that in the context of all the other things that are going on, this is going to be pretty tough to pull off without. The other thing is mortgage rates are really high. Yes, exactly. And this isn't going to lower mortgage rates. It's going to go higher. And it just creates more volatility and that raises the spread. So I just think it's going to be

That's going to be tough to overcome. Yeah. Yeah. I may be, you know, having egg on my face with that 50% handle out there. Well, I have to say one thing. Chris never loses a bet. So, Chris, do you want to bet, Cliff, a dollar? He never loses. He never loses. Oh, I don't know. Yeah. A dollar says – A dollar. A dollar.

I could do that. By the end of 2025. Yeah, sure. That doesn't mean they're actually, they've consummated the transaction though, right? Yeah, no, no, that, boy, he's, see how careful he is? That's what it is. You see, Mark? That's how it's done. That's how it's done.

He's already drafting the contract. The codicils. So, okay, but we're running out of time. So Cliff, since I have you, what, and I've been asking anyone in the financial industry, financial system, the same question, because I get the question all the time. What is going to do us in? What that we're not paying attention to? Is there anything out there in the system that,

A financial system, financial markets, financial institutions, anything that, you know, is kind of sort of out there on the on your radar screen, you're saying, hey, I feel a little uncomfortable about that. It may not be a problem today. It could be a problem down the road if, you know, the direction of travel continues as it is today. Anything out there that you want to call out?

I'd be keeping an eye on the whole private market sector, private credit sector. Yeah, private credit. Yeah, private credit is one that, you know...

it doesn't keep me up at night, but I, I, what is it? It's about $2 trillion or so at this point, you've got pension funds rolling in and you know, you've got insurance companies that are players and sovereign wealth funds. And it starts to feel a little bit about things that we've heard about back, you know, 17 years ago. I'm not saying it's any close to that, but it does smack of some things where you've got,

There's a lot of direct lending going on, a lot of proliferation of the integration between some of these private credit groups and traditional banking. And that feels a little, a little,

shadow banking like to me and feels like that, you know, there are all these synthetic risk transfer things going on between some of these institutions. And I'm not, again, saying I won't say the sky is falling, but I watch a little bit of that, that and you hear people talk a bit about private credit when they're not talking about AI and other things that are going on. But that's one that I would keep an eye on simply because it's

It's it's there's been more money coming into it, but bad things can happen, right? We're talking highly illiquid assets, hard to unload with when the bad times hit. These are, you know, hasn't been tested and tough markets.

Lots of leverage, potential for defaults, not very well regulated, a lot of increase in underwriting risk, and that spillover effect possibly to banking. So that's probably one that I would keep an eye on. But like I said, it's probably not one that's going to bite us tomorrow. Well, you know what? I've got a paper coming out next week, next Tuesday. I'll send you a draft. It's on the private market markets and trying to –

assess how systemic they are you know it's a very statistical piece kind of using different

data sources and econometric approaches to try to infer how interconnected private credit has become with the rest of the system and how much of a risk it poses. But I'll send it along. I'd be very curious. That'd be great. I'm always envious of you guys sitting on top of all this wonderful data and all this fun stuff. Data's pretty cool. Yeah. Yeah. It reminds me of a CRO of a major bank once told me that if it's growing like a weed,

Good chance it's a weed. Yeah. For all the private credit folks out there, I'm not calling you a weed. I'm just not. But if you're growing really fast and at the same time, you're bragging about how fast you're going to grow in the future. My antenna go up, you know? Yeah.

And I'm unfortunately, I've worked for a couple of those banks in the past that were just like that. And so I bear the scars of my PTSD that is still here today. Well, I guess that's a countrywide kind of the rapid growth there. Countrywide and, you know, WAMU in its earlier days, right? Hey, Cliff, it was really very nice to have you on. I really appreciate it. Thank you for taking the time. And it was a great conversation.

And we'll work on that contract on that bet. Okay. All right. No matter how you write it, I wouldn't sign it because he never loses. He never loses. That sounds like the house. They're always going to win. Hey, thank you so much for having me on. I appreciate it. It was a great conversation. Yeah. We'll have you back for sure if you're willing. Guys, anything else you want to say before we call it a podcast? Chris, Marissa?

I just thank you. Thanks for coming on. Yeah, excellent. Well, okay. With that, dear listener, we are going to call this a podcast. Take care now.