Freddie Mac, the government-supported mortgage finance company taken over by the government 18 months ago along with Fannie Mae, is waiting for the Obama administration to come up with a plan that will revamp the two agencies along with the whole area of housing finance. Waiting in the wings to implement that plan is Charles “Ed” Haldeman, Jr., who was appointed CEO of Freddie Mac last July and has already moved ahead with a strategy to revive the somewhat demoralized 6,000-employee agency. During a recent interview with Knowledge at Wharton, he discussed his approach to managing people, his views on what’s ahead for the real estate sector, and why he feels the work that Freddie Mac does is “absolutely critical” to the country’s welfare.
An edited transcript of the conversation follows.
Knowledge at Wharton: Charles Haldeman, thanks for joining us today. As we all know, the Obama administration is moving to develop a plan to reshape both Fannie Mae and Freddie Mac. I wondered if you could give us your thoughts about what that plan should look like.
Charles Haldeman: I’m not really able to do that for a pretty clear reason. In our current arrangement with the government — we are in conservatorship — it’s been made quite clear that we are not in the business of lobbying or advocating. We are seeking to be folks who can provide information, data and resources, and have the decision makers benefit from our knowledge and expertise. But I’ve got to be pretty careful that I don’t get into the advocacy business.
We’re a little bit fortunate in that the Secretary of Treasury, Tim Geithner, [recently] testified before Congress and gave us some insight into his thinking about the future of the GSEs [government-sponsored enterprises]. By way of a time table, he said it would be a [matter] of months, not years. So that gave us some insight into his thinking. Further, he did make it pretty clear that he did not think nationalization would be the right answer going forward. He also said breaking up the GSEs into multiple GSEs was not the best solution, either. Further, he said that … we have got to think about the housing finance system holistically — not just Freddie and Fannie and what’s best there, but how the entire system can operate best. What would be the best form of regulation for the entire system?
So I think he gave us insight, and I was pleased about that. The employees were pleased because one of the things he said very explicitly was that the country is fortunate to have the infrastructure, the systems, the knowledge [and the] the employees of the two GSEs. As we think about the next business model, we must make sure we retain this. That certainly was good news for us. So I’m afraid I’m going to have to rely mostly on what the Secretary of the Treasury says, so that I don’t cross that line and become an advocate or begin to be thought of as a lobbyist.
Knowledge at Wharton: If you [could choose], what would the housing finance system look like? And what would be the role of GSEs in that system?
Haldeman: One thing that I would for sure want to be able to retain would be the wonderful asset we have in our country — which is the ability essentially all of us have to get a 30-year fixed rate mortgage that has prepayment flexibility. We in our country take that almost as a given. We think of it almost as a right. We’re so accustomed to it because we’ve always had it. Certainly it’s always been true in my lifetime. However, in the rest of the world, it’s very, very unusual to have such an instrument. Much more typical is that they are variable rate and short in duration — some as short as five or 10 years. So, I think we are really privileged to have the instrument we have. And right now what an unusual situation: Not only is it 30 years, not only is it fixed rate, not only does it have the prepayment ability, but the rate is below five percent for a 30-year fixed rate. A pretty remarkable instrument right now.
So one of the things I would want to retain for sure would be that 30-year fixed rate instrument. A second thing I’d want to have would be uniformity throughout the country — not regional differences — which we didn’t always have in this country. I think our system now has uniformity by region. I would [also] want the system to be somewhat counter cyclical. Housing itself by its definition is a cyclical industry. We can have a housing finance system which either emphasizes that cyclicality — makes it worse, exaggerates it, if you will — or we can have a housing finance system which tries to be counter cyclical. I think a system that is counter cyclical would be helpful.
Those are a few of the elements that I’d want to make sure we had in the housing finance system going forward.
Knowledge at Wharton: You were appointed to this job in July. At that point you were at Putnam Investments, correct? When you first went to Putnam back in 2002, becoming CEO in 2003, the company was recovering from a scandal involving some activities with its traders. One of your immediate goals was to try and improve the morale of employees, get the company back on its feet, and so forth. The experience of doing that, you said last summer, would stand you in good stead for your new role at Freddie Mac. How has that worked out? Have you, in fact, been able to improve staff morale, refocus the agency’s goals, clarify its mission, and perhaps most important, recruit new people into jobs that have been vacant for quite a while?
Haldeman: Yes, you’re absolutely right. When I was recruited to the job, the company did not have a CEO, did not have a chief financial officer and did not have a chief operating officer. And so that was one of my first jobs — to recruit people. And we’ve been very successful in getting some extraordinary people to join us. We got them pretty quickly. So that in itself made the rest of the employees feel good — that we went from having those three vacancies to getting three senior people in place pretty quickly. The stability and certainty was good for the entire population of employees.
But beyond that, I think we’ve done a number of things. One is to try to be as clear as we can about our near-term focus, our near-term vision for the company and for what our business plan is going forward. We’ve made it as clear as we can that we have a job to do in the near term. That job is to maintain liquidity in the mortgage market — both the single family market as well as the apartment market. — that we are the place people are depending on for liquidity. In fact, last year the GSEs accounted for over 70% of the mortgages in the single family area and over 80% in multi-family. So we are the source of liquidity. One of the messages we give to our employees is that the country is depending on us for that liquidity.
Secondly, we say to our employees, “Near-term, the country is depending on us to work as hard as we can to try to prevent foreclosures and to allow families to stay in their homes.” We have been very successful in working towards that goal. Last year, we helped 272,000 families through various programs stay in their homes.
So, in summary, one of the major themes we’ve given to employees is that the work we are doing is absolutely critical. And we’ve got to do it every day when we come to work. That is in part so that people don’t spend too much time thinking about what’s going to happen 18 months or two years from now, because that’s unknown. That’s where we were in the beginning of this conversation. We just don’t know. I wish I could give our employees more certainty about that but I can’t. We’ve talked openly with employees [about the fact that] we believe there’s important work for us to do now, let’s do that and the future will sort of take care of itself. We’ve also talked to our employees about a business plan which has to do with getting us ready for the next chapter — whatever that will be. It has to do with getting our infrastructure, our systems, our business processes in the most efficient and effective place possible.
So, I think we’ve been open and direct with the employees. I’ve met with about 500 or 600 of them in small groups of eight or 10 so that I can speak to them in the way that we’re talking today. We have town hall meetings four times a year where we get everybody together. We do as much as we can to communicate clearly to our employees what we’re focused on near-term and what we can tell them about the future. So it certainly has been an important part of my job to try to get people energized, motivated, working hard. I sometimes ask myself if I’m allocating my time correctly, because I do put a lot of time into this. And I reached the conclusion that given that we have 6,000 employees out there, if I can boost their energy just a little bit — make them five percent more productive — that’s a pretty good day’s work. So that’s why we spend so much time with employees trying to make sure that they understand the important role they have at the company.
Knowledge at Wharton: Your position as the CEO of Freddie Mac gives you a very unique vantage point to see what’s happening in the real estate sector as a whole. What do you think is going on today in the sector? What’s likely to happen over the coming year or so? How is the business plan that you’ve drawn up in tune with those emerging realities?
Haldeman: We would have to divide the real estate market into segments. So let’s talk about the single family market first. That’s the largest piece of our business. What we see there, we hope, is some signs of stabilization — stabilization in terms of pricing and therefore stabilization in terms of new home construction and transactions. [There is] not certainty about stabilization because there are two very large factors that could be going the other way. One would be unemployment at a very high level and slow job growth going forward. The second would be a potential back log of foreclosures that could be coming to the market. Those might disrupt the stabilization that we see going on now. The hope would be that as the economy is gradually recovering, there will be a modest upward tilt in job growth and some movement up in housing prices, which then allows us to endure some of the foreclosures that come onto the market and have them work through the system.
With regard to the multi family part of our business, the apartment business, what we see there is a very good record by Freddie Mac thus far. Our delinquency rate in our multi family business is only 15 basis points right now, so we’ve done a great job there. However, we do think that there is going to be a move up in the industry default rate. Also, we will have a move up in ours as well. So, I think that business has not reached stability yet. And there will be further problems in that business over the next 12 to 18 months. The good news is there is activity there. A large part of that activity is because of mortgages being provided by the two GSEs — Fannie and Freddie. If one looked at a third segment of the real estate business — the commercial office building where there is not a GSE — you would see a lot less activity, because there just is not financing available for those kinds of properties at anything like acceptable prices.
In summary, we believe that we are most likely in a stabilization zone. Single family businesses still have some problems yet to go in the commercial side of the business.
Knowledge at Wharton: The boards of directors of companies — both private, public, government agencies — have come in for a lot of criticism over the past few years — for rubber stamping management initiatives, for not providing enough scrutiny in terms of auditing, etc. How is the board of directors that appointed you different from the board that was in place a few years ago?
Haldeman: I really can’t speak about the board prior to my arrival, but I can tell you about our current board, which is largely new. When Freddie Mac was put into conservatorship in September 2008, a fine man named John Koskinen was asked to be the chairman of the board. He has wonderful experience in government and in public service and recruited some wonderful people to join him. The board has people who are very experienced in risk management, accounting and financial accounting, real estate — a wide range of experiences and backgrounds that are relevant to Freddie Mac. I can assure you they are a very, very smart group, a very hard working group, and a group that takes its responsibility very seriously. One has to remember that they agreed to take on this responsibility at a very, very difficult time. So all of their motivation had to be around the notion of public service and trying to help the country through this difficult period. They bring that [attitude] to the table every time I interact with them.
So we have very, very strong oversight from our board. I’ve enjoyed working with them. I’d also say, however, that we get oversight from our regulator — the FHFA [Federal Housing Finance Agency] — a government agency which is our conservator. Essentially every major decision that I make, I would seek board approval and then, in addition, seek approval from our regulator.
On some subset of the issues I deal with, I have to go beyond that and speak with folks at Treasury. And, of course, if it’s a compensation issue, I have to go beyond that and interact with [pay czar Kenneth] Feinberg. So there’s a lot of regulatory oversight here. For some people, that would seem to be a burden of being a CEO; it would not be their first choice. I took the job with my eyes open and would say that the agencies that I work with have been as effective and as responsive as one could hope. And so I’ve not had difficulty working them.
Knowledge at Wharton: Before you joined Freddie Mac you must have had a view of what the situation was. How did your assessment of the situation change once you joined the company and became the CEO? What lessons did you learn about how Freddie and Fannie got into such a big financial hole? And what could be done to avoid such situations in the future?
Haldeman: In about every respect possible, my preconceived notion before taking the job was wrong in the sense that Freddie is way better than the public perception, or the perception I had before I arrived on site and learned about the company and met the people. Said another way, my due diligence was all about reading things and talking to people who had left the company. That reading and those conversations established a preconceived notion of what the company was like. It was very much different, and much, much better, once I arrived on site.
Knowledge at Wharton: How so?
Haldeman: One of the major ways is that the energy of the people, the commitment of the people, the work ethic of the people, the morale of the people — the employees — were way better than I could have ever expected it to be, based on what they had been through. Based on the public criticism of Freddie Mac, based on the change in management at so many different times and based on the vacancies in the management, there was no reason to expect that they would be as energized and motivated and hard-working as they are. The major explanation that I’ve been able to come up with is that the people who elected to work at Freddie Mac really believe in the mission of the company. They elect to work there because they believe that housing is so fundamental to the values of America and the success of the country — they are really believers in it. That’s what motivated them. So, the quality of the people, the motivation of the people, the morale of the people certainly surprised me.
A second thing was how easy and pleasant it was to work with the government agencies, with the government people. My whole life has been in the private sector where there’s sort of this image of what people are like at government agencies and what it is like to work with government officials. I was subject to that preconceived notion and found it to be completely different. [I found] really smart people, responsive people, people who are trying to solve problems and willing to help me solve problems. So I have a very, very positive view of that relative to what I expected going in.
And on your latter point about some of the things that Freddie did wrong: I haven’t spent a lot of my time examining the past. I’ve been trying to focus myself on influencing the future. But one of the places where I think my perception is different is that if you read the newspapers, you think of all of the problems with the GSEs. And [yet] it’s become clear to me during my time at Freddie Mac that while the GSEs may not have been perfect, they have done a lot of things right. One of the statistics that I cite to try to explain this point is the simple one about Freddie Mac. Freddie Mac’s single family mortgages are 23% of the total market. So if you look at U.S. single family homes, we own 23% of the market. If you look at those mortgages that are 90 days delinquent, that are seriously delinquent, we’re only 9% of them. So we have been very, very good in terms of underwriting and good in terms of trying to keep people in their homes…. I think we’ve got a great company and I’m proud to be there.
Knowledge at Wharton: So while you’ve been pleasantly surprised by the professionalism and commitment of the employees there, there must be a few things that worry you. I wonder if there’s one special thing that, for instance, keeps you up at night when you consider the task ahead of you.
Haldeman: Yes, one of the things that worries me is that 6,000 employees understand that they don’t know what their company’s going to look like in 18 months or two years. Lots of people don’t deal [well] with that level of uncertainty. I worry that as the economy gets better, some of our people –because of that uncertainty — might be open to thinking about a job some place else. We might have talent leave us. Because of that, I am one of those who would urge the decision makers — that is, the Obama administration, the Treasury Department and Congress — to get on with it and figure out what to do, because we’re doing a good job now and I’m proud of the job that our folks are doing. But it is fragile. I’m not sure that we can keep it going indefinitely with that kind of uncertainty. So that would be the number-one thing I worry about.