SFA’s Michael Bright on capital markets in 2021

Below is the transcription of the interview. These transcriptions, powered by Speechpad, have been lightly edited and may contain small errors from reproduction:

Sarah Wheeler: Welcome, everyone. This is Sarah Wheeler, Editor in Chief at HousingWire, with the latest episode of our Housing News podcast. I’m very excited to introduce our guest today, Michael Bright, the CEO of the Structured Finance Association, the nation’s leading trade group for the securitization industry. Michael previously served as the acting president of Ginnie Mae, director at the Milken Institute’s Center for Financial Markets, senior advisor to the U.S.  

Senate banking committee, vice president of BlackRock’s financial advisory unit, and senior vice president at PennyMac, among other roles in the private sector. So, Michael, welcome to Housing News. 

Michael Bright: Sarah, thank you for having me. Great to be here.  

Sarah Wheeler: We’re thrilled to have you. So, the first thing, we start out, we really want to give people a sense of who our speakers are. And one of the things we found is like, no one gets into this industry in the same way. So, we’d love to ask you, you know, how did you start? How did you start your housing career?  

Michael Bright: Oh, boy, a long time ago, a long, long time ago, in a galaxy far away. No, interesting question. So, I was probably, I guess, 23 years old, and I was going to graduate school in DC, a place called SAIS, it’s Johns Hopkins advanced, it’s an international studies school. And, boy, I was casting a wide net.  

Honestly, I had no clue what I wanted to do with my life whatsoever. But I knew certain things that I liked, I knew I liked finance, and I liked markets, and I liked public policy. And so, I interviewed for a couple jobs on the hill, I was working at a think tank. They gave me this job offer to, you know, be like a research assistant. None of the DC jobs paid anything, like what was enough to support just a, you know, a studio apartment in town.  

I still don’t know how a lot of the 20 somethings do it, when they try and go into public policy. So, I was also looking into finance. And this was 2002, so the dot com bubble had just happened, 9/11 had just happened, and New York wasn’t hiring anybody. So, that, so, like, the whole idea of going to New York to do finance wasn’t panning out. Staying in DC was, there was an option, but it didn’t pay anything. And randomly, you know, got connected with Countrywide, with some folks out in the West Coast.  

And didn’t know much about the company, didn’t know that much about mortgage-backed securities or anything. But I flew out, and the weather was beautiful, and the building was outstanding. And I walk into the trading desk, which they had just remodeled, and, like, my eyes lit up. And I’m like, holy, there are all these people with all the screens and TVs everywhere and yelling back and forth?  

It was, like, straight out of Liar’s Poker. And it was nice weather. And the parking lot was filled with nice cars. And I don’t know, something went off in me, and I was like, this looks like a lot of fun, and I can learn a lot. So, ended up moving to the West Coast. And I worked on the trading desk there. And I did learn a lot, some lessons that were great, like how these markets work, and how mortgage-backed securities work, and how capital markets work.  

And then some lessons that were painful to learn, like how greed can infect people’s thinking, watching some folks realize that this couldn’t last, but some managers who wouldn’t accept that the housing prices couldn’t keep going up, watching the company basically eat itself from the inside with degradation of, sort of, lending standards and really the company was tearing itself apart.  

There was a group of folks that were saying this can’t go on, and there was a group of folks…and those folks, a lot of them ended up at PennyMac, to be honest. And then, a group of folks that were, kind of, like, no, that’s not true, we’ll just keep going. So, it got really ugly and gross at the end. But I tried, the whole time, to keep my head down and just learn the technicals as much as I could. And I will say that, as painful as ’07 and ’08 were, it was like 20 years of learning over the course of 8 months, just watching the markets come unglued, watching the repo markets come undone, watching the treasury markets disappear.  

I mean, it was really scary that you couldn’t trade treasuries for a while in ’08. So anyway, lot of lessons, I guess learned, some good, some bad. And then ultimately, and right after the financial crisis, I moved to DC, and I’ve been here for 12 years, 13 years now ever since. And trying to dedicate myself to having, harnessing the good of capital markets and what it does to grow the economy while avoiding the mistakes of the past and the, sort of, groupthink, and the greed, and the whole everybody go in one direction and not, and losing their minds.  

So, DC is a place that offers you the opportunity to, kind of, help nudge public policy for the good, and it’s been a really fun journey. And so as of now, I’m at SFA and it’s a great spot.  

Sarah Wheeler: That’s such a fascinating time to be at Countrywide and to really see that. I mean, you couldn’t have a better education than that for what you’re doing now.  

Michael Bright: It was. And even at the time, to be honest, even at the time I was aware that, you know, you’d have these days where the markets would just do stuff that the textbooks say is impossible. I mean, basis would widen out by 30 BPS, mortgage treasuries, and then whip back in by 20 basis points. And then one buyer or one seller could completely move the market.  

And then there would be actual arbs opportunities in the screen, where you could take delivery because Bear Stearns was dumping all their cash securities. And so, if you could take cash securities and hedge it with TBAs, there was free carry, which is a straight arb. They’re the same security, one is a future, one is cash. But no one had balance sheet, because all the firms were trying to dump securities off their balance sheet, just to raise cash.  

So, it was like, you’re sitting there and you’re, kind of, like, “This is not meant to ever happen.” So, I remember being both terrified, thinking, you know, the global financial system is going to collapse, capitalism is going to end, and it is going to be, you know, canned goods, and bows and arrows hiding under a basement. And there was, I actually think that was a pretty real possibility. But then I would try and take a moment and say, “Remember everything that’s happening,” like, I have, like, notebooks with notes of some of the stuff I saw just to try…  

Because I knew that this was a once in 100-year event. And so, you’re sitting here with a front row seat, to try and learn as much as you can about it. It was not the type of lesson that I would want to go through ever again.  

Sarah Wheeler: Right. Well, and actually that leads into my next question. Which is really, you know, jumping into the last year with COVID. So, having been through, ’07, ’08, you know, what we were faced with in 2020, you know, at least gave you a background for what this looks like. And my specific question is, you know, the structured, the SFA recently released its annual report for 2020.  

And one of the things it mentioned, was the way the association acted to help restore liquidity and capital flow through the capital markets. And I would love for you to walk us through a little bit of what that looked like because there were some weeks there in the spring that also were pretty scary.  

Michael Bright: Yeah, it’s true. You know, I will get myself a little bit in trouble by saying this. And I know that some of my members feel a little bit differently. So, I’m going to try and qualify it as best I can. It was scary. It was scary because we all didn’t know, you know, start going back to March of last year, we didn’t know what this was that was coming at us.  

And the idea that we’re going to close down the economy was just so baffling. You were kind of like, “I don’t… That can’t be right. There’s no chance.” And I’m reading these, like, studies that are saying, I don’t know, we’ll all have to go into lockdown for three months, and then you can, it looks like you can come out, you know, for a couple of months, and then we’ll go back into lockdown again. And I’m like, “What does that mean? It doesn’t make any sense.” So, it was scary on that regard.  

I never personally, it never set off inside of me the same, sort of, you know, chemicals of fear that, the way it did. And it could be because I was a little bit older. So, maybe I had a little bit more experience whereas, you know, when ’08 happened, I was 29 years old, and, you know, sitting on a trading desk trying to figure this thing out.  

That’s possible. But, you know, the financial system is just in a stronger position. I mean, it was super, super capitalized this time around, it wasn’t a leverage bubble. Leverage bubbles are particularly scary. And I think we got the impression early on that, there was a lot that we were going to have to wade through, but that there was a real commitment on the part of policymakers to deal with it and to deal with it aggressively.  

So, it wasn’t such a complex situation where in ’08, everybody knew they needed to save the financial system, but there was also a lot of anger at the financial system, justified anger at the financial system. That caused this push/pull in policymaking, and this one wasn’t that way. I knew that we needed to get the emergency lending facilities back up at the Fed. And I knew that Congress needed to, you know, flood the system with money.  

But I just felt like it was going to happen. Whereas I think in ’08, there was a real, there was a long time where it didn’t feel like any of that was going to happen. And so, this one was a little bit different on that front. The other thing that, for sure, helped, to your specific question, is that the TALF lending facility had been built in ’08 and ’09, and the team who had done that, which was brilliant, just a brilliant group of folks that I’d had the opportunity to work with in other roles in DC, they knew how to dust it off, you know, pull that playbook out, and get it up and running.  

And so, it happened a lot more quickly in this time around, and was operationalized quite quickly. And the market had some sense of what it was going to be. And QE wasn’t such a novel concept, it was just called monetary policy now, whereas in ’08, it was bizarre. So, you know, it was bizarre to a lot of people I should say. So, it didn’t feel as bad, but that’s because the response was very swift.  

And I think the politics were a lot easier this time, because it was a virus to blame, it wasn’t, you know, or a self-inflicted situation.  

Sarah Wheeler: Well, and to your point, I mean, I think people like you who had already been through a ’07, ’08, you had more tools at your disposal. You already, you know, you knew what that looked like, QE, all that monetary policy like you’re talking about. So great on that.  

Michael Bright: This time there was money on the sideline. We knew it, you knew banks had cash, you knew the Fed had a balance sheet and was not afraid to use it. You knew the Congress was willing to spend. And in ’08, it wasn’t the impression. You know, like banks were under capitalized, and they were facing, you know, capital withdrawals, and they were facing balance sheet insolvency, cashflow insolvency. So, it just felt different, a little bit, to me.  

Sarah Wheeler: Oh, absolutely. You know, over the last year, one of the things we saw, a lot of activity to prepare for the end of LIBOR. Would love to know where we are in that process. You know, the end of this year is supposed to be the end of LIBOR, where are we, transition? I know you guys have been working on that as well.  

Michael Bright: Yeah. So, LIBOR is going away. It looks like we have a little bit more time. You know, they’re willing to extend it for a couple of years, I think to ’23 for some reporting. But I think if you take a step back, honestly, I think we overcorrected on this one. I mean, I fully understand the scandal, and people have gone to jail, and should have gone to jail, and fines needed to be imposed.  

And there certainly, you know, needs to be a regulatory process to make sure that bids actually match, you know, the submissions for your overnight borrowing actually match transactions or can be validated. I think we overcorrected by making this thing go away entirely. But it, sort of, feels like there’s no putting that toothpaste back in the can, the decision has been made.  

And here we go. So okay, well, you know, the Fed has done, I think, and market participants collectively have done a reasonably good job of building this new SOFR product and building some liquidity in futures and stuff. That’s an ongoing process, but we know it’s happening. So, I think that for new contracts, and even for recently issued contracts that are going to reference SOFR, you know, there could be, there’s going to be bumps, and there’ll be some hiccups.  

And there’ll be some, like, spread weirdness that happens, but it’s a lot of eyes on it. So, this should get smoothed out quickly. So, we’ve made a lot of progress on replacing LIBOR with this, you know, Fed overnight funding raid, plus there’ll be some spread adjustments to, kind of, make it look like LIBOR. Where there’s work still to be done, and we’re working pretty aggressively on the hill on this one, is old contracts where the interest rate is based on LIBOR, and there isn’t fallback language that says, “If LIBOR goes away, what’s the replacement rate?”  

And there are, you know, hundreds of millions of dollars on these contracts across all asset classes. You know, up until very recently, I don’t think the world thought LIBOR was going away, no one contemplated the end of that. And so, contracts weren’t made with, you know, based on LIBOR plus a spread, with a, “Oh, by the way if LIBOR ever goes away you’ll switch to this,” because there was just no idea that, that would ever happen.  

And so, what we’re setting ourselves up for, I think, in LIBOR is you’re going to have winners and losers on both sides of a transaction when you have to make a subjective decision about what you’re switching to, you know, when LIBOR is not reporting. You have a contract that’s based on LIBOR without a fallback language, you know, that’s specified in the contract, someone’s going have to make the call as to what the new rate is going to be. And no matter what that is, someone’s going to feel like it’s too high, or someone’s going to feel like it’s too low.  

And so, really does set up a lot of risk of just endless litigation and confusion on the part of consumers, and frustration on the part of investors who are investing, you know, on 401(k)s and pension plans. And those are the two sides of a transaction. So, you’ve got the consumer who doesn’t want to get hosed, of course, and put into a rate that’s too high, on the other hand, though, that you have an investor, that’s a fiduciary to pension funds in 401(k) plans and retirement funds. They’re not willing to just give away spread. I mean, they can’t do that. They have fiduciary responsibility to their customers, and these are insurance companies, and well, you know, heavily regulated, large institutional investors.  

So, it really is setting up for not a good environment. And it can be solved with legislation that creates a safe harbor for those contracts that just says, if you migrate to, you know, silver plus, a spread determined by, pick the group, it can be a Federal Reserve group, it can be a consortium of industry folks who are on the ARC or a combination of the two, you know, then that fulfils the contract, and then you just end this risk of endless litigation. And so, we’re hopeful that we can get that safe harbor through. Otherwise, it’s going to get ugly between consumers and investors. Some of whom are the same person because, you know, the borrower may have their money in a 401(k). So, it’s a very strange dynamic that we’re building here.  

Sarah Wheeler: Do you feel like you’re finding consensus on the hill, I mean, do you feel like there’s a good chance of that coming through or…?  

Michael Bright: I once heard a saying that said, finding an affordable apartment in New York is technically impossible, yet every once in a while, it happens. I think the same is true of passing legislation, it’s really impossible to pass legislation.  

Sarah Wheeler: Right.  

Michael Bright: But every once in a while, somehow the stars coalesce, and it does. And I worked, you know, as a senate staffer for four years, and I can attest that it’s hard to pass legislation. It’s very strange how much human emotion plays into it, and party politics can play into it. And, you know, there’s a lot of issues that are technical, and the lack of understanding can get in the way of it. So, this one’s got all of that stuff. It’s got technical issues, it’s got Wall Street related things, it’s got consumer groups there. So, it’s not, nothing is easy when it comes to passing legislation. There are a couple bills that have been introduced by Democrats, and they’re pretty well written, in our view. And we think that they take into account a lot of the considerations.  

And so, what ends up happening is, oftentimes, you know, if you’re in the other party, and someone brings to you an idea, you don’t like it just because it’s not, you know, necessarily your idea. So, it’s really micro, micro, micro politics that I think could be at play here. That isn’t to say that, you know, that there are bills that are perfect, and that, we shouldn’t have a discussion around it. I just, it’s kind of strange that you have something that does align interests in a lot of different people in our market, and then people suddenly people go to their sides and retreat. And so, it feels like there’s appetite on the Democrat side to advance it.  

And it feels, at the moment, like the appetite is too willing to advance a safe harbor bill that doesn’t become, you know, a messaging bill for other things in the market. If that changes, then, we’re in real trouble. I think on the Republican side, you know, Senator Toomey was a former swaps trader and understands this stuff. And you talk to him, and he, you know, he really, you know, knows that he understands this stuff. So, he could be an ally, I think in that, and we certainly brought to his attention there’s a lot that they’re doing to get the banking committee set up, so, we’re hopeful that we can build consensus. But like I said, passing legislation is a really, really arduous task. – And working with Congress right now, that’s God’s work right there. That’s just… And so… 

Sarah Wheeler: Right. Well, you know, let’s talk about ESG initiatives. I’m excited about this. You know, I feel like this scenario where maybe we’re really reaching a tipping point, especially if you look at Fannie Mae issuing Single-Family Green MBS. Yeah, I’d love to get your view on this, you know, where do you see this growing?  

Michael Bright: Listen, I’ve never seen a dynamic takeover the market as quickly as something like ESG has just, totally dominates all conversations right now. And, you know, I think in Europe, a lot of the movement on that was regulatory driven. You know, so desire on the part of European regulators to make sure that assets under management consider sustainability factors. In the U.S., for the most part, it’s being driven by investor preferences. And so, you have Gen X and millennial investors, even my generation, you know, or Gen Y I should say, who don’t want to invest in things that they don’t think are sustainable for the world. 

I think, you know, you finally have an awakening where people realize that 7 billion people sharing this planet, means we all have to be conscious of how we’re going to do that, or we’re all going to pay an egregious price. And this is why you see, you know, 100-year storms happening every 5 and 10 years, because it’s just, you know, we’re not thinking about that stuff. So, this is a market-driven demand. And the numbers are staggering, 10s of trillions of dollars of investments are now seeking, you know, sustainable assets, sustainable projects, they want to be able to say that these things are sustainable. And so, the tipping point, we’re already over the tipping point in terms of demand.  

What needs to happen next, and I think is going to happen over the next couple of years, and I think SFA is going to play a big role in this, is we need some baseline set of standards for what constitutes sustainable. Or even more basic than that, what type of reporting needs to be out there so that you can determine for yourself if this is sustainable? So, it’s as simple as right now if something along the lines of 70% of investments that claim to be in sustainable assets, the only thing they’ll tell you about those assets is that the asset manager, ”considers sustainability when making investment decisions.”  

So, that’s not really as robust as we need it to be. And I think that, you know, the term greenwashing is something that is out there. And I think that the market wants to figure this out, otherwise this opportunity will pass us by, because, then, people will become skeptical on the whole thing. And, so we need to figure that out. So, I think that there’s going to be clearly a regulatory push to have some minimum baseline standards.  

But I think the industry wants to do it too. And so, there are multiple factors. I don’t want to be involved as a trade association necessarily in determining, you know, what score on E, S, and G a certain thing should get. That’s probably not, this wouldn’t be in the convening, you know, space. But to get everybody together and say, as we make a decision about whether or not this thing can fit an ESG fund, or we’d be willing to invest in it, what type of information does it make sense to have?  

And then gather everybody to commit to delivering this information on a regular basis in some form, so that the market can actually price this stuff with the data and analytics that it needs. And so, that’s a project that we are involved in, and every time we get the industry together for a symposium or a virtual conference to talk about this, it’s like massively oversubscribed, you know, can’t get enough people in, so the demand to figure this thing out is there.  

So, we have to figure out what data needs to be delivered, what analytics are needed. And then people need to start talking about how they’re going to, you know, use transparency to show how they look at sustainability factors and making investment decisions. And I’m sure there’s going to be a regulatory push to build some baseline standards. Kind of, like, I think the analogy is, sort of, like, you know, to call something organic food, you have to have, meet a certain level of, you know, criteria.  

I think that’s going to be something like that in ESG. That’s an oversimplified analogy, but I’ve been, kind of, trying it out. So, I think all of the above is going to happen over the next year. So, it’s a really interesting time. And if we do it right, then, maybe we do have a shot at, you know, sharing this planet safely, but while also productively growing the economy.  

Sarah Wheeler: No, I love your insight on that, super interesting. It is interesting that there’s the demand from the investor side. And, you know, just how to build it, how to make it. I didn’t realize that that’s all that it needed to be considered a sustainable, you know, fund or whatever is that they consider sustainability options. It’s like, well, that seems really negligent.  

Michael Bright: Exactly. And it’s not, that’s not to everyone. What happens is you start to read, if you just Google, you know, research reports, like, you know, how much is in sustainable assets, you’ll get these numbers that are just eye popping. There was one report that said 74 trillion U.S. domiciled assets are in sustainable investment. I’m like, “74 trillion, holy maloney, what are those?” And then you start to dig down and you realize there’s no reporting on what those are.  

And so, it’s like, “Okay, well, yeah, we probably need a little more transparency on what this means.”  

Sarah Wheeler: Love that. And that leads right into my next question, because you talk there about setting standards. And so, you recently wrote a piece for HousingWire on the CFPB’s ATR rule changes, and you advocated for an industry standard-setting organization. You know, SFA pledged to work to help build this with the first step of, kind of, working to build data-driven industry consensus.  

So, I would love you to talk in some detail about how this would be a better alternative, why you feel like this is the future.  

Michael Bright: Yeah. So, you know, the debate over where to set this safe harbor from the ATR rule, which you need a qualified mortgage. That has different connotations so… You know, it’s worth remembering that I think the original drafters of the ATR rule had in mind that you would have to demonstrate this ability to repay using a series of factors.  

And if you couldn’t, or if, you know, when there was a foreclosure situation, the borrower could say, “You didn’t consider these factors, you made me a loan just based on the collateral value.” You know, the lender wouldn’t be able to foreclose on the house. That was the original intent. And then it evolved to say, well, there should be some baseline set of standards where if you meet those you do get a safe harbor, so that, you know, right out of the bat, or out of the gate you’ve met all the criteria.  

Okay, sensible enough. And then, so that gave rise to this QM. But in the years past, we haven’t really had a very healthy conversation around what that safe harbor was meant to be. And so, it just punted to the GSCs, you know, anything that their AUS approves or anything the FHA approves is automatically a safe harbor. And then the rest was subject to Appendix Q, which was the original attempt at writing income and documentation standards for what constitutes I in the DTI ratio.  

And I think that it was pretty… Well, how do I put it? You know, it really would only work for very standard traditional borrowers with lots of W-2 and lots of, you know, basic income type verification. So, gig economy workers would be left out, you know, certain demographics that aren’t white communities with cookie-cutter type homes, easy to appraise, don’t really meet that standard.  

And so, it’s unclear whether that was really the intent. So, we have some perverse, you know, unintended consequences here. So, the way we’re looking at this is that the CFPB can set the safe harbor with a variety of tools. It can use something like this APOR plus a spread. It can use other market-based metrics.  

It can use its own model or whatnot, and set that safe harbor. But in all of them, literally all of them, there is still a requirement to consider, document, and verify income. And there isn’t the ability, in our view, that the bureau to define exactly what document, consider, and verify mean, so exactly what income verification is required?  

And to do that in a way that is both safe and tethered to the intent of the ATR rule, but also dynamic enough that gig economy workers and shifting demographics in our society allow black and brown communities to have access to homeownership in a safe and protected way. So, I don’t think a few people inside of one agency can write that perfect rule.  

I think that’s too much of a task for anybody, it’s a complete Sisyphean task. So, what we have as a concept is that, if you gather the industry, and you make sure that it’s the whole industry, so not just the originators and the issuers of bonds, but the originators, the bond issuers, and the bond investors who have an interest in making sure that these loans, you know, do meet ATR standard.  

And you come together, and we start a conversation around what type of documentation standards constitute good-faith determination to consider a document and verify, then, we have a real shot at, present something that could be a little bit more dynamic in nature. And so, it could work as simply as this, and this is what we’re building. You could have a group that, sort of, constitutes, call it a board, but it’s really, sort of, an oversight commission, that would have diverse membership banks, non-banks, servicers, and lots of investors, PLS investors, hold loan investors, the gamut.  

And that group could say, “Well, let’s pose some questions. Let’s start asking, like, what type of questions do we need?” So, for example, how many months of bank statement lending do you need in order to show that it performs similar to a W-2 borrower? We don’t know.  

Is it 1, 6, 12? Like, what’s the answer to that question? So, our vision is that, that set of, you know, sort of, we’d have a diverse set of folks that would constitute this board, that would ask these questions. And then, we’re building the data and analytics to, then, answer those questions, and back it up with data. So, we can say, it looks like based on this historical period, and then this is hypothetical, six to nine months of bank statements tend to perform similar to W-2 in these industries.  

That could be an answer. So, then, you’re just putting it out there. And if everybody agrees, then, you know, the investors have a little bit more certainty that they’re investing in a loan that’s a legal loan, the issuers know that they can defend that as having made a good faith determination to consider, document, and verify these standards.  

And we can back it up with data, data that the entire industry, the whole ecosystem, where there’s tension that’s naturally built in, because you have people on different sides of a trade, can help sort of answer these questions. So, this wouldn’t be any time soon in my mind, you know, blessed with, like, the ability to deem something as a QM or in the safe harbor just because this organization did it.  

That could be a dream down the road, there’ll be a lot of governance, you know, that would need to be built in conjunction with regulators to do that. That isn’t really what we’re targeting. What we’re targeting is, that’s why we call it a standard-setting organization instead of a self-regulatory organization. If you have a standard-setting organization, we’re just going to build some self-governance for the non-agency market that we’ll all live by.  

Regulators are going to come and go, they’re going to change the way they look at these things. Sometimes the, make the safe harbor tight, sometimes they’ll maybe make safe harbor wide, that’s going to be dependent on, you know, who’s in charge at the time. But there’s nothing that says you… I think this industry is going to be here for a very long time.  

It wants to be here for a very long time, and it wants to both make loans in a safe manner, but also figure out how to make sure that nonstandard borrowers have access to homeownership too, and do it in a way that doesn’t run afoul of the intent or the letter of the ATR rules. And so, there’s no downside to having an industry consortium come together and have this conversation.  

There’s literally no downside. I mean, even if we’re going to have debates and opinions that differ, and maybe challenges getting consensus now and then, then, that’s information too. I mean, that’s knowledge that all the participants have. They know that we can’t come to agreement on this or that or the other. But, it’s really about figuring out what type of income and verification standards make sense, and how do you back that up with data?  

And there’s a lot of enthusiasm for it. And we think it’s going to be a helpful additive piece to the discussion.  

Sarah Wheeler: Yeah, so I was going to ask you, you know, what kind of response have you gotten to that, and are people excited about it, you know, going forward with that?  

Michael Bright: Yes. You know, once you explain that this isn’t, no one’s asking, no one is setting up a contract where we’d be asking for the authority to regulate entities. This isn’t another, you know, authoritarian institution, this is a data sharing discussion institution, where we look to achieve consensus.  

And we don’t have consensus on something, we won’t publish it. And if we do have consensus on something, we can publish it, you know, originators and investors can choose how they want to use it. Some of them may rely heavily on it, some of them may, it’s one piece of, you know, verification and a lot of other pieces of verification that they would probably need. That’s probably where this would go.  

And maybe, you know, the occasional Amicus brief could come out of this group down the road if needed. Once you start to put it that way, then, the issuers and the originators get really excited about it. When you see the investors, we can give some degree of certainty as to what a legal loan is. Because the investors just, kind of, say to us repeatedly, “We can do credit analysis, and we can do prepayment analysis.”  

But I can’t buy something, and then just find out that it was illegal because there was a standard that we didn’t know existed. Or, you know, or what looked reasonable to us, is it reasonable to somebody else, or whatnot? So, if we all, kind of, build an organization that can define reasonableness, and reasonableness standards on these things, it should mitigate some of that risk. And then, now you’re starting to get in a world where, you know, issuers and investors are also not going to have to be pointing the finger at one another, in the event that a loan goes delinquent, because maybe we all were at the table when we figured out that this standard was acceptable.  

So, it does, it could build for a little bit more of a productive dialogue. And so, that has been very warmly received with a lot of, sort of, enthusiasm. So, now we’ve just got to deliver. So, we’re working on costs, staff, data, organizational structure, who should be on it, etc. And all that is going to be coming together in the next couple of months.  

Sarah Wheeler: That’s exciting, we’ll be watching that. Keep us apprised of how that goes. You know that one of the things that ATR touches on, and the debt-to-income ratio and all of that, is something that we’ve, you know, obviously over the last year been talking a lot about. You know, reaching those nonstandard borrowers, and especially in communities of color, where some of the debt-to-income ratio, the way that that’s, you know, the way that student loan is calculated into that, and then the ability to repay.  

And that kind of leads into our next question, which is really, you know, SFA has talked about championing diversity, equity, and inclusion in the industry. So, you know, what does that look like for you guys over the last year, and what does that look like going forward?  

Michael Bright: Well, so look, I can bring this question almost back to my first question. So, or the very first question you asked me, when I first got into the industry, and we’re talking about Countrywide. Countrywide was not unique, in that, most decisions were made by white men. And the trading desk was mostly white men. And a lot of the folks had very similar backgrounds.  

And certainly didn’t have visibility into the communities that were getting loans, that they should not have been getting under the terms that they were getting, okay. And so, I can trace, I feel as though there, you know, there are many factors that contributed to the financial crisis. But one of them has got to be a groupthink of lack of diversity in C-suites and in boardrooms, on trading desks, where capital is actually allocated.  

And if part of, if my motivation in life, which very much is trying to figure out how to harness the good and avoid the dangers of, you know, bringing capital markets to bear, to the allocation of capital, it doesn’t make any sense that everybody, you’d have a group of people that all look and sound the same, you know, recruiting from each other’s schools and whatnot, to build that type of a capital market system.  

You’re not going to be able to serve the real economy effectively. You’re not going to be able to… You’re probably going to careen from crisis to crisis. You’re certainly not going to do a very good job at keeping up with demographic changes that the country has right now. So, for me it’s, and for a lot of folks, okay, I’m not a trailblazer on this, this is, I’m representing the views of many people. You know, the business case here is stark and its obvious.  

You know you’re on top of that, the moral and ethical imperative, that we have to not surround ourselves just with people, you know, who we recognize as being exactly like us, because that’s just a very limited way to go through life. And then, the enjoyment of surrounding yourself with people with different backgrounds, different experiences, and their ability to challenge your thinking, and the fun that this brings.  

So, you’ve got this whole host of reasons to say diversifying is not charitable work, it’s good forever, it’s enjoyable work, it’s fun work. It makes us smarter, it makes us better, it challenges our thinking, it’s going to make our financial system stronger. So, I believe that strongly. And, but again, I’m not alone on that.  

I’m representing a view that I think has become increasingly the norm. And so, we’ve got a lot of pent up, there’s a lot of energy to do meaningful work on this. And so, our theory of the case is that, you know, there are multiple prongs that we need to do. So, you know, there are barriers to entry into financial services, of course, for students of color and people of color coming out.  

Even if, you know, we’re looking at a lot of data that suggests that even if recruitment classes are very diverse, the mentorship abilities, and the ability to, sort of, navigate what feels like probably a very white world with all kinds of microaggressions that people don’t even know that are happening, and lack of awareness around that, that takes a toll. I mean, it takes a real toll on people of color, women in these, both, you know, all of that gets hit pretty hard.  

And so, even if you build recruiting classes, which we’re trying to do, we’re reaching out to HBCUs, and we’re building some scholarships and internship programs with the University of District of Columbia. We’re really excited about getting that thing off the ground. But it’s not, it doesn’t just stop there. You need to make sure that you showcase that the industry wants to be diverse and takes it seriously, and we’re going to give speaking slots to people of color and to women.  

And, you know, we’re going to make sure that their voices are promoted and heard. At our Vegas conference last year, we had 12 keynotes, none of them were white males. So, you know, we’re kind of committed to doing that, to just making sure that we put a sign that says, “You’re welcome here, not only are you welcome here, we need you here.”  

Okay, so, please, come help us be better. And here’s networks of, you know, of mentorships, here’s networks of opportunities. Like, let’s all be committed to this, because it’s existential for our industry. And so, we’re building, we’ve got a couple of work streams in our DEI initiative. Got a network of networks thing where we’re going to convene, sort of, best practices from a lot of companies that are going.  

We have a scholarship fund, we’ve got money allocated to make sure that we have keynotes who are diverse at all of our events. We’re pushing in op-eds and editorials. So, we’re, kind of, coming at it at all angles. But for me, success is going to be that when the industry does gather at our events, which we do a few times a year, when we look out at the audience, we want to look at an audience of leaders in the industry that looks a little bit like America, right, that looks like cross section of our country.  

Not looks like a cross section of Connecticut or whatever. No offense to Connecticut, and it’s a lovely place. You know, that’s what we’re going for here.  

Sarah Wheeler: No, I love that. And I think that, you know, if you think about, you know, the reason we asked that first question, how did you get into the industry? It’s just not like 10-year-olds are like, “I want to be a, you know, I want to be in, you know, finance.” But especially maybe no one is like, “I want to be in structured finance. I want to be in asset classes. I want…” You know, I mean, it’s just, it’s even one step beyond say banking or whatever as far as like awareness and the path to get there. And so, it’s really encouraging and exciting to think about how you’re building those recruiting classes and really going after it.  

Michael Bright: No, you’re exactly right, because it’s all about the tributaries into the river. So, yes, you could say I like the idea of finance and markets, and I’m, you know, a kid in college, and I like CNBC and Bloomberg, and I read The Wall Street Journal. But you don’t know that that, most kids don’t know just chain investment banking, bond trading, sales.  

And then within that, you don’t know, there’s liquid rates trading, there’s structured products trading, there’s all, you know, these different things that you’re only going to learn through experience. And you’re oftentimes only going to get, learn if someone taps you on the shoulder and says, “Why not try this? We’re adding in this department, and here’s what’s fun about this particular asset class.” And so, yeah, it’s those moments where it’s, kind of, like, well, learn to be conscious about who you’re going to tap.  

Be aware of that. And make sure that when you get your team assembled and you look around, it should be a team that’s going to challenge your thinking, not a team that’s just going to constantly affirm your thinking. And if we do that, I think we have a shot.  

Sarah Wheeler: Love it. And again, keep us up to date on that because that’s something that we’re really focusing on. And it’s going to, that’s going to change things. It’s going to fundamentally change things when the people at the table, and people making these decisions, you know, don’t all look the same. And I know you guys have been doing this for a while, but I’m just saying, like, just industry wide, in any part of our industry, this is what’s going to change it.  

Michael Bright: Agree, totally agree. Yeah, exciting.  

Sarah Wheeler: Well, for our last question, there are no softball questions in this interview.  

Michael Bright: Uh-oh.  

Sarah Wheeler: So, I’m going to talk about, let’s talk about GSE reform.  

Michael Bright: Cool.  

Sarah Wheeler: So, you know, you’ve really, SFA has really called for an orderly transition in any GSE exit from conservatorship. And I just want to, you know, where are we now? So, things got a little bit crazy in the last months of the Trump administration, where things seemed to be hurried along there. Where are we now with the Biden administration, what is even the appetite for GSE reform? You know, can you give us any update on that?  

Michael Bright: Oh, man, I have to admit, so I have such a love-hate relationship with this issue. On the one hand, the work that I got to do in Senator Corker’s office, working with Senator Warner, and Senator Crapo, and the coalition that we built in 2013 around legislation, to try and, you know…  

Say we can move past dependence on these companies while also leveraging and keeping the things that they do well, and we’ll add certainty and intellectual honesty toward the government’s role in the mortgage-backed security while also having resolution mechanisms that can be credible for the institutions and the capital regime that should work, etc., etc. And then, you know, we tried to look at, you know, what’s the right affordable housing regime?  

Meaning, what are the right mandates for the companies? How does direct funding for organizations like Housing Trust Fund, Capital Magnet Fund, how does that relate with goals and duty to serve? How are they complimentary? How are they not?  

And in any event, I loved that year. I have the scars, emotional and physical scars from that year. I never worked. You know, it was, it really was, especially in the acute phases in the spring of 2014, really working 18-hour days, 7 days a week.  

I mean, we were in the office till midnight, and people would just like, “We have to go home and get a little bit of sleep,” and then back at 7:00. So, there was a real push, and it was a very fun thing. And I think the thing that was most proud of was that, we checked a lot of ideology at the door, there was a lot of attempts to sit across the table from somebody who had different concerns from you, or different perspective than you, and say, “Okay, well, how do we address your concern, while keeping in my concern, and not forgetting we have a coalition people who already support this?”  

So, it’s this game of add support without losing support. And how do you balance that? And it was a fascinating, fascinating look at the legislative process and the trading process there, and the listening to one another process. And it was never partisan. I mean, it was always a bipartisan thing. Okay, so that was a very fulfilling moment in my life and time in my life. And it didn’t pass into law, at least, you know, it didn’t pass into law then.  

And I got the opportunity to work with Ed DeMarco, when I was at the Milken Institute, to say, “Okay, that thing didn’t pass, but, like, is there a way to simplify it and do something similar, where you keep all of the objectives that you had there, but do it in a way that we can understand that the transition would work?”  

And so we thought maybe we would use the Ginnie Mae security, etc. Okay, so that was also an enjoyable thing. At this point, the discussion around, like, wholesale structural revamping is purely an intellectual exercise. At the time it really, in 2013, 2014 it was not, I mean, we really were talking about something meaningful.  

Now, I’m not saying we hit the bullseye on every issue, we certainly didn’t. But we didn’t think that we had it the time either. I mean, this is iterative process, the thing was constantly getting better, and it was sort of evolving. You just feel that, that energy doesn’t exist. And so, I’ve moved on, and I encourage others to move on. And so, when we talk about GSE reform, I think it makes sense for us to shift what that means.  

Okay, so, I don’t think it just means getting them out of conservatorship, to me, that isn’t reform. In fact, I think that’s like the opposite, it could be going back to an intellectually dishonest structure that we had before the financial crisis, that did get us into some trouble, that did cause some really awkward meetings between our then Treasury Secretary Paulson, and the Chinese, and the Japanese, and those investors.  

And I got to know all those investors when I was running Ginnie. And I don’t think we should recreate that. So, I don’t think GSE reform means tear the whole, you know, like, rebuild a system with some complexities the way we had been doing with legislation in ’13, ’14. I also reject this idea that reform just means getting them out of conservatorship with a bit more capital, that’s not reform either.  

So, I think the interesting conversation is, you know, how do we build a housing policy that’s equitable and fair? How do we encourage the use of sustainable environmental factors in lending? How do we, you know, disseminate information and data so that everybody can, kind of, build and grow from it?  

You know, how do you keep the GSEs continuing to provide utility functions that only they can provide, because they’re the ones with the charter, but in a way that they don’t take in…? You know, it’s not like they are orbiting the system by doing it. So, it’s more about regulation and regulating them well, and providing strict, you know, good oversight, and having a good conversation.  

So, to me, reform is now a different thing. I think we just need to reform the way we look at management of the GSEs. And so, I’m an advocate of an FHFA that provides, you know, sound regulatory oversight, asks tough questions, makes sure that business lines are being respected, but also is informed about what these things do.  

I’m an advocate of a White House that understands the value that they can provide to the economy, and maybe nudges them to do more in certain spaces while not being reckless. And I’m an advocate for Congress that takes seriously its oversight responsibility, and does so with a base of, you know, solid knowledge, so that they understand not only the technicals, but also, you know, the social impact.  

But that to me is what constitutes, you know, good governance. And that’s really what I’d rather build, since this idea of reform isn’t really there. And so, the term is a little bit, maybe been hijacked, so I don’t use it really anymore. But like I said, I think that, you know, my journey on that one, the things that were fulfilling to me is a lot of people around me got a lot smarter on how this stuff works.  

I got smarter on how a lot of things work. You know, we produced a bipartisan set of options that were by no means perfect, and we knew they had more work to go, but it was an enjoyable process. And I think, you know, friends were made amongst elected officials and staff that would last lifetime. And yeah, I mean, and now we are where we are, and that’s okay. I just think if we can have informed, sound oversight and governance, then, we’ll be all right in that space.  

Sarah Wheeler: Love that. And that is a perfect way to end, informed, sound government. We’re all for that. Let’s all have that going forward.  

Michael Bright: It’s a journey of a lifetime, turns out.  

Sarah Wheeler: I so appreciate you sharing your insights on all these different, these are really some of the most compelling things going on in our industry right now. So, really appreciate you coming on and sharing with us. It was a great interview. So, thank you.  

Michael Bright: Thank you. Thank you for saying that. Thanks for having me. Had a great time. And yeah, happy to do it anytime.  

Sarah Wheeler: Hi, I’m Sarah Wheeler, the host of Housing News. And today, we’ve interviewing Michael Bright, the CEO of the Structured Finance Association, in a wide-ranging interview that talks about market liquidity, GSE reform, the end of LIBOR, lessons learned from the last financial crisis and even more.  

You’re going to love it. So, thanks for joining us.