Lykken on Lending

As soon as SCOTUS (the Supreme Court of the United States) issued the rulings on the director of FHFA my phone blew up and Kim Schubert with Freddie Mac, she’s been a long-time listener and supporter of our podcast, really appreciate her. She asked if we were going to have Mitch Kider, come on to talk about that ruling. And so we have recorded an interview with Mitch Kider about the recent Supreme Court ruling.

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Recent Ruling By SCOTUS With Mitch Kider

It’s Monday, June 28th. This show is created by mortgage professionals and it is for mortgage professionals. We’re so grateful to have you as our audience. Our commitment to you is to bring you timely information to access anytime and anywhere. We have some timely information in this episode. We have Justin Demola joining us. He is now the President at Lenders One. He runs everything now. We’re so excited to have Justin.

We’re going to be talking about the upcoming conference and some of the things that are going on at Lenders One. We’re going to talk about the upcoming Summer Conference, some of the initiatives they have going on, and what’s on their radar. This new economic environment is bringing in some new perspectives and challenges. Justin Demola will be on.

Also, a big shout-out to Kim Schubert. As soon as SCOTUS or the Supreme Court of the United States issued the ruling on the director of FHFA, my phone blew up. Kim Schubert left away. Kim Schubert is with Freddie Mac. She’s been a long-time listener and a supporter of our show. I appreciate you, Kim. She says, “Are you going to have Mitch Kider come on?” I was dialing, Mitch, about that. We have an interview with Mitch Kider about the Supreme Court ruling, and you’re going to want to tune in to that interview as well. We got a double hitter today and as a result, we’re going to shorten up the first part of the show so we can fit it all in. Stay tuned all the way through the whole episode.

I want to say a special thank you to the Industry Syndicate. We’re a part of the Industry Syndicate. There are many great podcasts you can listen to. Go over to IndustrySyndicate.com and check them out. Also, Don Layton was the former President and CEO of Freddie Mac and he published an FHFA report on the credit risk transfer and the position that Calabria was taking on.

It was published on May 28th, and then the ruling came out so we’re very encouraged, but I published that article in there, as well as the newsletter from Mitch Kider’s firm, The WBK Firm. We’re going to be expounding on that in the Hot Topic segment. Stay tuned all the way through this show. We’re going to say a special thank you to our sponsors. The Mortgage Bankers Association of America. It’s great to have our partnership with them.

Join the MBA if you’re not already a member but you do have the opportunity to have your voice heard through the MBA even though you’re not a member. You should be, but you could do so through the Mortgage Alliance application. I encourage you to go to the Play Store for the app for Mortgage Action Alliance and have your voice heard. We need to have all our voices heard and they do a great job of bringing this information to us.

Also, Finastra’s Fusion Mortgagebot Solution. They do a great job with a leading point-of-sale technology with full LOS. I encourage you to check them out. We also did an interview with Dan Putney back in January. We always have great information. We talked about a survey they did. You’ll find that interesting. Also, we have Lenders One as a sponsor, and we got in this episode Justin Demola. Also, we have The Mortgage Collaborative as a sponsor. I’m thrilled about these two.

One of the things I love about these two coops, we’re members of both. I love what these two do about connecting lenders with fellow members and they bring them together. We’re going to hear about what the Lenders One perspective is and what’s going on. I’m very excited to have Justin later on the show. Also, The Community Mortgage Lenders of America. It’s another association that works with independent mortgage bankers having their voice heard on the Hill.

Also, Insellerate. We had Josh Friend on. It was another great interview with lots of information for those looking to go consumer-direct direct, but it’s not just consumer-direct. It’s working with consumers and how you connect with them in an intelligent way. Check out that interview. Also, Knowledge Coop. It’s a great learning management system, as well as Mobility MMI. I had a conversation with Ben Teerlink. I had an interview with him here talking about some of the things that their technology does. It allows you to connect with the realtors.

Also, I’m going to get Dale Larson of Modex. It’s another father-and-son team that does a great job of helping you on the recruiting, providing you with technology, and more business intelligence into who’s doing what out there. We have a license with both Mobility MMI as well as Modex and we use both of them. I encourage you to consider doing so as well. Also, a special thank you to Rob, Les, Allen, and Matt for their contributions each and every week.

I want to give a shout-out to Kim Schubert from Freddie Mac for being the first on the list of many to make me aware of the Supreme Court ruling. I reached out immediately to Mitch. We had a number of our listeners say, “Could you get Mitch on? I love to get his perspective.” Without further ado, let’s get into the interview with Mitch Kider. I’m excited to have back on the show someone that doesn’t need an introduction. He’s an icon in our industry. Mitch Kider who is the managing partner of WBK. Mitch, thank you so much for coming on and spending a few minutes with me today.

It’s my pleasure, Dave. It’s good to be here with you.

I’m calling and asking you to come back on the microphone to talk about the newsletter that you published on June 23rd, as soon as the US Supreme Court, SCOTUS announced the ruling providing that Calabria, the Director FHFA, is unconstitutional. I thought your article was well-written. I asked some questions on that article and I want to get into that. As we start this topic off, any opening comments? You’re an attorney. You always have to give opening comments. What are your thoughts on this broadly?

My thoughts are a lot of people seem to be shocked by the Supreme Court’s ruling but it was fully expected. It follows on the heels of the Seila case about a year ago in which the Supreme Court held that the structure of the CFPB was unconstitutional with one director that had been only removable for cause and for no other reason. The court held that it violated the separation of powers, that you served the executive branch in the President’s authority. I think that decision was the correct decision and there is no distinction here with the FHFA director. I’m not surprised by the result at all. It has taken a while to get here but it was bound to be.

In your newsletter, you start talking about the second paragraph, “This will have significant implications for the GSE.” That leaped off the page. If you could expound on what you mean, this will have significant implications.

Let’s start with this. Director Calabria pushed very hard to get to the point where both Fannie Mae and Freddie Mac could come out of conservatorship and be privatized. The first significant implication is that’s not going to happen anytime soon. It’s not going to happen for years, quite frankly. Fannie Mae and Freddie Mac, the GSEs as they’re known, are more and more governmental entities. As a result of this decision, that’s going to move more in that particular direction. The President now has the ability to utilize Fannie Mae and Freddie Mac to set out and further his housing goals for the country. That is very significant.

It’s significant in a good way for the mortgage industry, I would assume. If you look at Don Layton’s article that he published on May 28th in The Joint Center for Housing Studies, that article seemed to be pretty solid from where Don stands on this. It is well-known that the industry has been frustrated with Calabria for some time.

This seems like it’s good for us but expound on that. What could be some unintended consequences? Are you anticipating that? You are a good litigator. You are a strategist at the core and you are looking at, “This looks good now,” but is there anything in this that you’re saying, “This could open up more litigation,” I’m assuming.

Let’s talk about these particular lines. This looks good now because it promotes stability. As broken as our housing finance system may be in some ways, it works well. It works better than anybody else. Fannie and Freddie are right at the heart or right at the center of that. Along those particular lines, it will be business as usual although, there will be much more emphasis on affordable housing. There will be many more protections and parameters set out to ensure fair and equitable lending practices.

Is that ultimately good for us? Yes, that’s absolutely. All of those things are good for the country itself. The downside in all honesty is as Fannie and Freddie are not privatized, they remain in government conservatorship. They do act effectively as a governmental entity. On a long-term basis, that’s not necessarily a good thing. In fact, I don’t think that’s a good thing on a long-term basis.

You need ingenuity. You need the ability to be flexible and malleable, especially in the matter which you’re dealing with the economy in the housing market itself. Private entities find that. The more we fall into the government controlling Fannie and Freddie and effectively controlling our housing market as a result of that, the further from what is happening out there we get. You need privatization, ultimately. The problem is, there’s no political will to get there.

SCOTUS Ruling: You need ingenuity and the ability to be flexible and malleable when dealing with the economy in the housing market itself.

This brings up an interesting question. You are celebrated and you are the only individual who has successfully sued CFPB on behalf of PHH. Is the fact that something is now been ruled against the FHFA Director, is there any chance that this could have any implications or cast a shadow over the CFPB director, who had a similar five-year term? I was wondering about that.

It already happened. In the Seila lawsuit a year ago, the Supreme Court ruled on that very issue and ruled that in fact, the structure of the CFPB was unconstitutional for the exact same reasons. Now, that structure has a single director and that single director is removable by the President with or without cause. Do I think that structure is going to change? No.

I don’t think this case is going to have any implications on the CFPB in the structure that’s there. In fact, I think it’s going to follow the CFPB. What would have been better? What was sought by those people who challenged independent agencies since we know that our constitution talks about the three branches of government and not the fourth branch of government being these independent agencies.

What would have been better is a commissioner or something along those particular lines, or a bipartisan commissioner as we have with the FTC, the SEC, and other governmental agencies as well, but there’s nothing about this case that pushes us in that particular direction for either FHFA or the CFPB. My guess is it’s going to stay with a single director who is in fact going to be removed every time there’s a change of administration.

This does get more of the politicized ideology of whoever is in power is going to have an influence on that. This enables the President’s housing policy to be supported through the GSEs.

That’s exactly right. Let’s face it. When you talk about FHFA, it had been politicized by any director that was there. It was politicized by Watt. It was politicized by Calabria. They get appointed based on their political ideologies. The Vice President had the same ideology. What this does is it recognizes that there’s someone who was elected, the President of the United States. He controls the executive branch and if you serve his authority, it’s a separation of powers issue.

You can’t say, “No, you don’t control this particular branch of the government.” You have to have the ability to put your own person in there and remove someone at will. That’s what this case does in short. Now, we are going to have Calabria and Trump with someone on the same page ideologically. Calabria came out. He was with Vice President Pence prior to being moved into this particular position. Now, you’re going to have someone whose ideology follows that of President Biden and his administration. Also, his housing policies will be further as a result of that.

You mentioned in the second of the bottom paragraph in your letter that you said, “The court relied on recent decision.” You just referenced that. Is that the case of CFPB that you referenced, or are there others that are included in that? I wanted to get a clarification.

That is a case in which the court ruled that the single director was removable only for cause and the CFPB was unconstitutional. That’s the case that we’re referencing.

That’s the case you referenced. There wasn’t something broader than that. I wasn’t familiar with that, at least that label. I knew we always refer to it as the CFB ruling, but that is what you’re referencing. For the audience, I want to encourage you to read the fourth paragraph and get into the Recovery Act that created the FHFA. I don’t want to get into that because most of you are astute followers of the industry, very involved, and you understand.

For those of you who are coming into the industry for the first time, we’re very fortunate to have you. We’re very grateful to have you, learning about the industry. First of all, I encourage you to sign up. We have a link to how you can sign up for Mitch Kider and WBK’s newsletter. They are published on a weekly basis. I encourage you to sign up for the newsletter. Mitch, I’m assuming that we have your permission to publish that link so people can sign up.

That’s great. It’s free and informative.

I was reading your most recent one but especially on things like this, there are a lot of people commenting on it. You are the gold standard when we look at what are the implications rather than the sensationalization of it. You get to the heart of it. Let’s get to the heart of this thing. You talk in here that the Supreme Court addressed four issues. You state what they are in this article, but for those who may not have read this, talk about those four issues that they addressed.

The first issue is whether or not the plaintiffs in this case or the party that in fact brought the case are shareholders in Fannie Mae and Freddie Mac. What they wanted to challenge was the dividend policy sweeping Fannie Mae and Freddie Mac’s profits, putting it into the Treasury and only leaving a minimal amount of capital in those companies themselves. These shareholders challenge that particular case.

The first question the court has to address is whether they have a statutory claim on the Recovery Act. What the court settled was they don’t quite frankly. The statute is pretty clear that in fact what was done by way of a third amendment to dividends being paid out to the Treasury Department was proper from a statutory perspective. The fact that the FHFA director’s position was unconstitutionally structured doesn’t affect that. The statutes would allow the dividend agreement that was entered into between the FHFA and the Treasury Department. That’s the first issue there.

The second issue is whether the shareholders have a standing challenge that the FHFA structure is unconstitutional, and they certainly did. If they didn’t have standing, the court would have ruled that there was no standing that was available to them. In other words, they weren’t the proper parties to bring a suit like this, but they’re impacted by this. They’re shareholders in Fannie Mae and Freddie Mac, and FHFA is their regulator. They were the proper parties to bring this particular litigation.

The third issue is whether the agency structure was unconstitutional. That’s something we talked about. Even though the shareholders had the ability and standing to file the cases that they filed, particularly, the two consolidated cases, even though they had the ability to file that, the court ultimately ruled on the merits and actually agreed with them on the constitutional issues. It said, “This is an unconstitutional structure because there are three branches of government and this is a single director who effectively is not answerable to anyone. In fact, you can’t remove him other than for cause.”

They have standing, and they won on the constitutional issue. In terms of the fourth issue, what remedy is appropriate if the structure is unconstitutional? The court followed the precedent that they set in last year’s CFPB case, which I referred to as the Seila case because that was a firm that brought that particular lawsuit on someone’s behalf.

What the court said is that the appropriate remedy here is writing through statute. The appropriate remedy is if you have a statutory for the creation of the director of the FHFA and it says that he can only be terminated for cause. They cross out that for cause and he can be terminated at the will of the President. That’s what they did.

It seems like this was not a win for the shareholders.

It was a big loss for the shareholders, in all honesty. I believe that this ends the litigation for the shareholders effectively. No court is going to revisit this particular issue and make a declaration that in fact, the dividend formula had swept the money out of the GSEs and into the Treasury instead of letting it stay in these companies for their capitalization purposes and for dividend purposes for their shareholder. The shareholders are held up.

This ends a very long saga that goes all the way back to 2012 in this particular matter. This was not a win for the shareholders. Even though the shareholders wanted a ruling that in fact, this is an unconstitutional structure, that isn’t what they were getting at. They want the ruling that this is an unconstitutional structure and as a result of that, the agreements that were made were void. That didn’t happen here.

I’ll never forget the couple of times I’ve been on Fox Business and commenting about this. My phone would light up anytime I commented about Fannie Mae and Freddie Mac. The shareholders are very loud out there. Their voice is going to be silenced.

There were a lot of big players like funds, private equity firms, and others that made big bets on the privatization of Fannie Mae and Freddie Mac, and these dividends were set aside for the Treasury Department. There are a lot of people who made big bets on that stand and lost a fair amount of dollars.

Moving forward now. The mortgage bankers that are reacting to this, dealing with this, and planning their future in light of this, what would you say to them?

I would say to them that FHFA, Fannie Mae, and Freddie, Mac go to the core of their business. They are very important entities. I don’t think that there are going to be dramatic changes in the manner in which they sell their loans. These loans are securitized or things along those particular lines. However, the heart of the President’s housing policy is around affordable housing and fair and equitable lending. The policies and procedures of Fannie Mae are going to play a great deal of emphasis in that particular arena, That’s what they need to be prepared for. Those are areas that they need to look at.

What about liquidity? It seems like with this being inside of the Federal government and staying within the Federal government, liquidity should be more assured than if they’re being spun off, I’m assuming from a standpoint of dependable liquidity.

In fact, the GSEs were in an awful lot of trouble. The government had to bail them out and in all honesty, it was a good thing that the government stepped in and bailed them out because of the economic consequences to the United States and the world. It would be devastating for Freddie Mac to go under, but a lot has changed since 2008.

Fannie Mae and Freddie Mac make an awful lot of money, and liquidity is going to be afforded to them by government allowances. Are they stable? Sure, they are stable. They are effectively governmental entities right now. I understand they are GSEs or Government-Sponsored Entities, but they’re in conservatorship. They are effectively a tool of the government. Liquidity is not an issue for them.

I wonder if it’s no longer to be the GSEs, we’re just going to have the GEs or Government Entities. What’s the sponsorship part of it anymore?

I hope ultimately that’s not going to be the case, but it will be for a number of years going forward. Do I think that another administration in years to come will finally end this conservatorship? I do. This administration may end the conservatorship in a few years. I have my doubts about that. As I said before, there’s no political will to do it. Our mortgage market is working well and there’s no upside for politicians to make that change.

How about when it comes to QM with innovative new products? Does this help that? The administration wants to push that. We’re dealing with housing affordability and housing supply. This doesn’t have anything to do with that or does it?

Fannie and Freddie will have their own underwriting standards and requirements to purchase these particular loans. They are effectively QM loans. The non-QM market that will develop outside of Fannie and Freddie is still developing over the last couple of years. I think that the market, in light of this decision in Fannie and Freddie, is staying where they are. I think the non-QM market will remain relatively stable. I don’t want to predict massive growth in that particular market because it’s pretty easy to stay within the lines and deal with Fannie and Freddie and sell them loans.

As we wrap this up, we have to go over to CFPB and state auditors and how the states are playing. We’re seeing more aggressive roles by the states and auditing companies. Any thoughts as we wrap this up and share any wisdom? Should lenders be more concerned about CFPB? We hear about their expansion, but also the states. We’re hearing quite a number of our clients, and I’m sure you are hearing as well that the states are becoming more of a threat.

I’m concerned about them both. I’ve had these conversations with officials at the CFPB. The CFPB’s focus today is fair and equitable lending and COVID-19, which translates to servicing. Also, how consumers are going to be treated, those consumers have suffered economic consequences as a result of COVID-19, once they are coming out of the forbearance, and things along those particular lines. From a regulatory perspective, almost all of their energy is being spent in these particular areas.

I understand their desire to stay on top of those two particular issues. I don’t think you are going to see a lot of guidance on RESPA, loan originator compensation, or things of that sort. Will you see enforcement? Yes, you will. When enforcement comes around, the CFPB learns of the problem either through an examination, complaints, or something else along those lines.

While the CFPB will continue to focus heavily on fair lending and COVID-19, I think many states are acting effectively as an arm of the CFPB. They are the enforcers right now. They are auditing for not just their state law requirements, but they’re auditing for the Federal law requirements as well. They’re very aggressive in their interpretations and they’re very aggressive in enforcement. That’s the dynamic that we’re going to see going forward for quite some time.

SCOTUS Ruling: While the CFPB will continue to focus heavily on COVID-19, many states are acting effectively as an honorable CFPB. They are the enforcers right now. They are auditing for not just their state law requirements, but they’re auditing to be federal law requirements as well.

For our audience, if you’re not familiar with The WBK firm, I encourage you to become familiar. Get signed up with the newsletters. These are valuables and must-reads for me and my group of consultants that I work with. We find these to be the gold standards on what’s being reviewed. Go to our website and get signed up for the newsletter. I encourage our audience to get ahold of you. For those who may not know you, but want to get ahold of you and work with your firm, what’s the best way to do so, Mitch?

Email me at [email protected].

You’ll be so glad. Mitch is the go-to firm for our consulting firm that we recommend and we’re so grateful for it. Mitch, thanks so much for taking time out of your very busy schedule to join us and give our audience an update on this latest SCOTUS ruling. Thank you.

It’s my pleasure, Dave. Thank you.

Let’s get Alice Alvey in here for some post-interview comments. Alice, I know you have a short stop here. I want to get your thoughts on that interview.

It’s great. Listening to Mitch is always so informative. He explained things very clearly for us lay folks. One of the things that jumped out at me that he referenced was the idea that now we’re going to potentially have an FHFA director that switches with each administration. That’s great if you get somebody re-elected. Ast, they’re there for eight years.

However, does someone in that type of role have a vision for the overall success of a company and look at the bottom line for shareholders if they feel that their tenure is limited? I think that’s difficult. How is that person thinking? What are they trying to accomplish? Are they thinking very long term for the success of the agency? That’s something we’ll all be watching very closely and it’ll take an industry to keep them with that vision, regardless of how long they’re in office.

You brought up a good point. I thought we could politicize it anyway. The fact that we are not going to have a change of FHFA director with every new president or administration that comes in, it’s to be anticipated. I wonder if this is going to create more uncertainty. There’s so much more to this that we are thinking about after we conclude that interview. Uncertainties could be one of those questions. What else are your thoughts on this interview?

That was the biggest thing. The shareholders right now are going to have to rethink their positions. Is there any action that they want to take from here? This did seem to put an end to any kind of recapture of most of the profits that have already been taken, but we’ll see what happens going forward.

To be able to look at whether there’s another solution for Fannie and Freddie besides being in the control of the government. How do we try and still find a way through? It’ll take legislation to move them back a little bit to where they were, where they can think a little more outside immediate short-term goals and look at long-term goals.

I think there’s going to be relaxing to a degree. One of the things I heard that leaped out to me was the focus is going to return to affordable housing. That’s the biggest challenge that will happen in America. The policies and the FHFA’s oversight of Fannie Mae and Freddie Mac will be to encourage affordable housing. That’s going to bring in some potentially interesting new loan programs which would be good. We have the backstop of the Federal government there. It’d be interesting. Alice, thank you so much for joining me in the post-comments. I appreciate you being here each and every week. Thank you for hanging in here until the end because I know how busy you are. I appreciate it.

You’re welcome. It was my pleasure. Great interview, Dave. Thank you.

On our next episode, we have Ben Teerlink joining us from Mobility Mortgage Market Intelligence. I am excited about this. They’ve got some tools there that I’m not sure our audience is aware of, and you need to be because it gives you a real strategic advantage on where to go, what markets to go into, and with whom to do business specifically realtors.

Hopefully, that teases you to be here next week. It’s not that any of you need any teasing. You want to be here. We appreciate all of you who are regularly tuning in and those who are sharing this show link with other members of your staff. I appreciate that. I want to say a special thank you to our sponsors, Finastra, CMLA, LendersOne, Insellerate, Mobility MMI, Modex, The MBA, Knowledge Coop, and The Mortgage Collaborative. I’m so thrilled to have you all. Have a great week, everyone. I look forward to having you back here.

Important Links

• Lenders One
• Mitch Kider – past episode
• IndustrySyndicate.com
• The WBK Firm
• Mortgage Bankers Association of America
• Finastra’s Fusion Mortgagebot Solution
• Dan Putney – past episode
• The Mortgage Collaborative
• The Community Mortgage Lenders of America
• Insellerate
• Josh Friend – past episode
• Knowledge Coop
• Mobility MMI
• Modex
• Article – The FHFA Report on Credit Risk Transfer: Another Controversial Document from the Agency
• [email protected]