The press will have you believe the new CEO of Fannie Mae, Timothy Mayopoulos, is a lawyer through and through — a “well-regarded” lawyer if you go with what The New York Times says.
It makes sense. After all, prior to joining Fannie Mae, Mayopoulos built an impressive career as a lawyer for financial services firms, including Bank of America Corp. where he served as executive vice president and general counsel. The cut of his features — and his suit — the way in which he speaks support that theory to a degree. But, to be clear, Mayopoulos is built to be a chief executive officer.
He joined Fannie Mae in April 2009 as executive vice president, general counsel and corporate secretary and was appointed chief administrative officer in 2010. In June 2012, he took the reins from Michael Williams.
His resumé demands respect and indicates a diverse and successful financial services career. On paper, one might assume any individual with such qualifications would be the classic example of a stuffed shirt. This is certainly not the case for the very down-to-earth Mayopoulos.
“Call me Tim,” the relaxed Mayopoulos tells HousingWire. Less than a year into the job of CEO of the nation’s largest housing finance player, he comes across as settled in. He can spend an hour talking about the details of business and culture at Fannie Mae.
Some executives stay clear from discussing certain topics such as representations and warrants and loan repurchases, but Mayopoulos embraces the opportunity to discuss them at length. He said Fannie has good reason for its actions, and understands that while some people may disagree, there are some hard realities.
“I expect us to listen, make good decisions and clearly communicate the rationale,” he says.
“Fannie Mae, Freddie Mac and Ginnie Mae finance together 95% of the $5 trillion housing market in the United States,” he says. “In a properly functioning market, Fannie Mae should not have such a significant share. There must be a correction over time, but conservatorship has offered the opportunity to fix mortgage finance. We must focus our efforts accordingly to this goal.”
Mayopoulos has the support of other big players in the market. Bank of America Chief Executive Brian Moynihan told the Brookings Institute in December that Fannie Mae is, and will always be, a vital part of the housing economy.
Moynihan and Mayopoulos agree that as the economy improves, housing must continue to calibrate the way business gets done. Private capital will return and compete with the government-sponsored enterprises, but in a way that must be nurtured.
According to Moynihan, the elimination of Fannie Mae via congressional reform, an outside risk this year, would be foolhardy.
“I don’t think changing Fannie and Freddie in some abrupt fashion is wise policy,” Moynihan said at Brookings. “We need Fannie and Freddie. They are critical to the transition.”
Nonetheless, both Democrats and Republicans in Congress occasionally remind the nation that Fannie Mae is expected to wind down. The desire to do so abruptly, however, is not as prevalent as last year. And these voices may continue to dim.
Fannie Mae, afterall, is paying back the Treasury, posing a lesser risk to the taxpayer, and turning a tidy profit.
For the third quarter of 2012, Fannie Mae earned $1.8 billion in net income, compared with its net loss of $5.1 billion a year prior. For the first nine months, the government-sponsored enterprise reported a net income of $9.7 billion. The new CEO of Fannie Mae doesn’t see the tide turning on this positive news.
“I expect we will be profitable this year for the first time since 2006,” Mayopoulos says.
FOCUS ON MORTGAGE TECHNOLOGY
A key focus for the GSE is attention to mortgage technology. Mayopoulos says that improvement to the way in which mortgage data is handled helps prevent bad loans from being delivered. Alignment with Freddie Mac in this, among other mortgage servicing practices, is helping to achieve this goal.
Still, there are challenges ahead. One of the most pressing issues is repurchases. At a recent HousingWire conference that included several Fannie Mae executives, some attendees raised concerns that the repurchase risk was growing. Fannie’s executives sought to assuage those concerns, and Mayopoulos adds to that chorus.
“Repurchase risk is actually decreasing,” he said. “Repurchases account for 0.25% of our post-2009 book, and that is getting smaller.” He said improved underwriting standards and clearer reps and warrants are partially behind the origination of better loans sold to Fannie Mae for securitization.
But it does not come without a price.
MOVING IN-HOUSE
The use of third parties to help Fannie Mae sell its REO properties is also coming to an end. Fannie Mae notified remaining vendors that the government-sponsored enterprise will transition REO sales work to Fannie Mae’s in-house teams over the next several months.
“We have reduced our REO inventory from 162,489 properties at the start of 2011 to 107,225 as of Sept. 30, 2012, “ Fannie Mae tells HousingWire. “With a reduced inventory of properties, Fannie Mae’s in-house teams now have sufficient capacity to manage our REO properties without the assistance of third-party asset management providers.”
Fannie Mae said it notified third-party vendors such as Vendor Resource Management and 24 Asset Management of the move with enough time to make necessary adjustments.
The mortgage servicing alignments aim to prevent foreclosures and reduce REO volume at Fannie Mae. Mayopoulos supports alternatives to foreclosure. It is his belief that a dignified exit for homeowners is vital and that short sales help the borrower maintain a brighter outlook.
In February, the Federal Housing Finance Agency announced a pilot program to sell some Fannie Mae REO properties in a bulk sale.
Fannie sold about 2,000 REOs in Chicago, Las Vegas, Los Angeles, Phoenix and Florida under the pilot.
Fannie Mae Chief Financial Officer Susan McFarland, who deemed the pilot a success, declined to give specifics about the future of the program, but said the GSE will keep bulk sales as an option.
Mayopoulos goes one step further. “We know that using local real estate professionals is, and will continue to be, the best sales strategy for the great majority of our REO. However, this does not preclude us from pursuing additional sales strategies where it makes sense to do so,” he said.
What this means is that Mayopoulos believes selling to owner-occupants using networks of local mortgage and housing professionals helps increase the return on these properties. He has a point: In an environment of house price appreciation it is better to attempt to procure the highest proceeds possible. A bulk sale may be more appropriate in a declining market.
At any rate, Fannie Mae is selling historically high amounts of distressed assets, though the methods may vary. But it can be hard to argue the GSE is shrinking. In fact, the opposite seems true.
SECURITIES ISSUANCE GROWS
Agency mortgage-backed securities gross issuance significantly rose in November 2012, the latest data available, driven primarily by an increase in Fannie Mae product production.
“There might be several reasons for higher issuance in November,” agency MBS strategist Sarah Hu of Royal Bank of Scotland said. “Some borrowers jumped to refinance their mortgages before the December g-fee hike.”
Agency MBS gross issuance rose 45% month-over-month from $138 billion in October to more than $200 billion in November. Fannie Mae products were up 76%, from $60 billion to $105 billion, according to agency MBS strategists Hu and Ashley Gam of RBS.
Overall net issuance also rose from negative $15 billion to $56 billion, which is the greatest addition of supply to the market since August 2009.
Overall, the projections for the GSE secondary markets are considered a net positive. In its 2013 outlook, for example, RBS notes, “We believe that the dominating force of Fed large-scale MBS purchases will trump developing headwinds in the mortgage market (such as rising prepayment uncertainty and reduced bank and REIT demand), leading to modest mortgage outperformance versus Treasurys over the course of 2013,” wrote Gam, with Jeanna Curro. “We believe that GSE reform will continue to move at a very gradual pace, keeping the stability of the mortgage market intact.”
A wild card to this, of course, would be the replacement of Federal Housing Finance Agency Acting Director Edward DeMarco in favor of someone who would call for larger write-downs from Fannie Mae. In such an event, bond investors would enter into a realm of larger uncertainty. But that is only one side of the coin. On the other, such a program could greatly benefit the lending and credit (borrowing) space for Fannie Mae’s current base of underwater homeowners. As long as the duration risk is downsized on new paper, and that seems likely in a low-interest rate environment, the prepayment surge should come and go relatively quickly.
The other factor to this scenario relies on the Fed continuing to purchase mortgage bonds from Fannie Mae at the historically high rate seen today. This is what helps keeps interest rates so low, and what should promote homeownership.
Mayopoulos, however, says the housing recovery still needs more than that.
He is convinced that, an environment of sustained home price appreciation is vital to the housing market recovery — and Fannie Mae’s ability to pay back taxpayers.
He, like DeMarco, believes principal reductions aren’t necessary. Improving prices ease negative equity and lower delinquencies. Mayopoulos likes the direction the credit environment is moving. As Fannie tightens, the private market can loosen. But this can change. Someone who supports principal reduction may permanently fill DeMarco’s role. In which case, Mayopoulos will follow the mandates from the FHFA.
“That is ultimately a choice for policymakers,” he said, adding that the current relationship between FHFA and Fannie Mae is effective and that everyone is working to make the mortgage market healthy.
“Everyone at Fannie Mae is driven by the desire to do something for the greater good of the nation. We have a common sense of purpose. Our team is remarkably resilient. They have ‘opted-in’ to improve housing finance. I’m impressed daily by the quality of the people I work with,” Mayopoulos said.
It is for this reason that he took the job, despite recent caps on CEO compensation and bonuses that put him disproportionally lower on the scale of CEO pay as it relates to the size to the size of the firms in Fannie’s circle.
It is nearly the only trillion-dollar firm that is led by a CEO salaried at $600,000 a year. But, as Mayopoulos said, it’s not about the money.
It’s about fixing mortgage finance. And that’s what Tim intends to do.
