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51 » VISIT US ONLINE @ DSNEWS.COM Our role is being redefined every year a bit by our conservator, and we're certainly aware that at some point Congress and the administration will start to form a consensus about how they see the mortgage industry moving forward. I think the Chief Economist role will start to emphasize how Freddie Mac enhances its role in that evolving space in a way that is consistent with the goals of the conservatorship. It highlights more of the significant business initiatives that Freddie Mac is carrying out that actually make for a better mortgage industry. We have several of those initiatives that are underway that maybe 10 years ago wouldn't have been highlighted as much. Certainly, the headline initiative that is very different from anything we did before is the credit risk transfer deals that we've been doing through our capital markets organization. We're selling off a lot of the credit risk of our mortgage securities to private investors and taking the taxpayer off the hook. I think we've been the industry leader on that front. We've been very creative and very suc- cessful in rolling that out. There have been lots of positive metrics pointing toward housing recovery in the last year, but the homeownership rate remains at its lowest point in decades. Why do you think this is? We talk about this every day. It's important to put that statement into a little bit of context. e homeowership rate hit historical highs during the run-up to the crisis. ere is certainly a line of reasoning to suggest that wasn't sustainable and it may not have been an appropriate target, but it has been a target of public policy. In order to achieve that rate of homeownership, there were certain practices in mortgage finance that we probably don't want to repeat going forward. at said, it's still quite a low homeowner- ship rate. ere are a couple of benign reasons for that and then a couple of reasons that are more troubling. e benign reasons are more demographic. e group of millennials that are coming into traditional first-time homeowner- ship age are not becoming homeowners at the same rate of previous generations. Some of that has to do with some of the hangover from the last recession. eir entry into the job market was slower. eir prospects were not as bright as previous generations early in their career. ey are overcoming a heavier student debt load. ere are some obstacles there that will probably work out over time, and of course, everyone in the industry is speculating, "When will the millennials start to look more like previous generations?" None of us really know the answer to that timing question, but it's something that we look at the incoming data every month for clues. As far as the less benign reasons, there is a shortage of affordable rental housing, and that's driven rents up and made it harder for people to accumulate savings needed for a down payment. is is happening in an environment where the credit box that most lenders are offering is much tighter than it has been historically. We've improved our un- derwriting guidelines to emphasize prudent lending, but if you compare our guidelines to what lenders are delivering, lenders are being more conservative than the GSEs are asking them to be. Part of that has nothing to do with the GSEs, but with the rapidly chang- ing regulatory environment that banks and other mortgage lenders are facing, it's very challenging keeping up with the constant changes. ere are also new regulators – the CFPB is something that didn't exist before the crisis. It's a new party at the table and banks are trying to figure out how they're going to deal with that. You see the evidence of that in the change in participation in mortgage lend- ing. e top mortgage lenders – Wells Fargo, Chase, Citi – their share of the mortgage origination market has declined for the first time in years, and the smaller lenders are start- ing to pick up the slack. at really reflects a strategic decision by the largest lenders in light of the changing regulatory environment. Until that regulatory environment matures, and there's more certainty and more clarity about who will be doing which part of this businesses, there will probably be a lower than desirable homeownership rate even as the other transitory factors work their way through the system. Some say the challenging regulatory environment has hurt the community banks and smaller lenders more than larger ones. Do you think the smaller lenders are getting more into the game? Several decades ago, the smaller lenders had a very large share of the total market. Essentially, the market was not very concentrated. en, over several decades through consolidation in the industry, and through the growth of a few very large firms, mortgage lending became concentrated in a smaller number of firms. at trend has reversed. I would say a lot of that has to do with changes in regulation. We're putting extra requirements on the largest institutions because of concerns about "too big to fail" and systemic risk. As far as smaller lenders struggling with some of the regulatory requirements, that's exactly true, but that probably hits the hardest at the very small end of banking. At the community bank level, if they need to hire one or two extra compliance people to deal with new regulations, that's actually a very significant cost for them. As a result, what you see at the small end of banking is community banks looking to merge with each other to get an optimal size to handle that cost. e thing about this regulatory environment is, it's not a mature environment. ere's been more rapid changes probably in the last six or seven years than in the previous 20, and it takes time for those changes to work their way through the system, for the regulators to fully work out how the regulations are going to be applied for Congress to evaluate how they are working, and for the industry participants to decide how to optimally allocate their activities given the guidance they're being given. So this is just part of an evolutionary process. is isn't how things are going to settle out. We don't really know what the end will look like because it's still in motion. "The thing about this regulatory environment is, it's not a mature environment."

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