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Moody's Talks - Inside Economics
Shelter from the Storm(s)
The Inside Economics team takes shelter from a tornado (true story), and Mark Calabria, senior advisor to the Cato Institute and former director of the Federal Housing Finance Agency, describes the FHFA’s efforts to provide shelter to the housing and mortgage finance markets during the pandemic. His new book “Shelter from the Storm,” is a fascinating telling of that difficult period.
For more on Mark Calabria, click here.
For more information on Mark Calabria's book "Shelter from the Storm," click here.
Follow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn for additional insight.
Mark Zandi: Welcome to Inside Economics. I'm Mark Zandi, the Chief Economist of Moody's Analytics, and I'm joined by Cris deRitis. Cris, good to see you.
Cris deRitis: Mark.
Mark Zandi: No, Marisa. Huh?
Cris deRitis: No, Marisa today, unfortunately. Yeah.
Mark Zandi: No, unfortunately.
Cris deRitis: Be back soon.
Mark Zandi: Good. So it's me and you solo. Have we, I don't think we've ever had a podcast when it was just me and you. Mano a mano.
Cris deRitis: That's right, that's right.
Mark Zandi: Are you up for this?
Cris deRitis: I'm ready. Go for it.
Mark Zandi: Well, I should say this podcast has really two parts to it. Part one is what we're doing now, and I think, a lot of economic data came out this week. The Fed met, a lot talk about, so we'll do that. But we'll keep it relatively short because part two, we have Mark Calabria joining us. Mark was the former director of the Federal Housing Finance Agency, FHFA, the regulator for Fannie, Freddie, and the Federal Home Loan Bank system. And we recorded that part of the conversation earlier today. We got interrupted by a tornado warning. We all kind of scrambled here, get into the basement, fortunately, it passed by pretty quickly. I don't think a tornado actually has come down, at least not so far. And so we cut that off, but that was a good conversation. We'll come back to that in a little bit. But here we are. This is now June 16th. Busy week on the economic scene.
Where do you want to begin, Cris? The consumer pricing? I don't know what there's a lot to pick from. What do you want to chat about?
Cris deRitis: Yeah, there's a lot of data came out this week. Some maybe conflicting signals or depending on what part of the argument you'd like to, you can find it to support your view. But let's maybe start with CPI, because I came out on Tuesday. And overall, I'd say pretty good report in the sense that CPI is coming in, the consumer price index of inflation is coming in. Maybe not as fast as everyone would like, but maybe as fast as would be reasonable to expect. So yeah, let's dive in there.
Mark Zandi: Yeah, so this is the kind of way I frame it in my own mind. CPI inflation, consumer price inflation peaked at 9% on the nose June of 2022, a year ago. We got a data point this week for the month of May four percent-ish. Was it exactly four, I think, wasn't it? Right? Four on the nose.
Cris deRitis: Yeah. Year over year.
Mark Zandi: Oh, I should say, yeah, year over year. That is important. It feels like we can state what, at least I can state, I'm curious whether you would agree, that it's going to continue to moderate. We're headed towards three here towards the end of the year, 3% year over year, and going into next, into the twos. And the reason I'm confident in that forecast is two things. One, vehicle prices now, new vehicle prices are falling and that'll continue. Used vehicle prices rose in the month, but it feels like they're going to start declining because auction prices are down. And that leads the CPI for used vehicles by several months. And that's going to happen. And more fundamentally, what's happening is we're getting more vehicle production globally, and that's allowing for more inventory on dealer lots and starting to take pressure off price.
Second, and more importantly, the cost of shelter, housing services. That's going to slow. It's kind of rolled over already in terms of growth rates, but it's going to slow much more noticeably over the next 6, 9, 12 months because that will reflect with a lag, the fact that rents have gone flat to down. So that feels like that's where we've been over the past year and where we're headed over the next year. Agree, disagree? Anything you want to say about that?
Cris deRitis: Yeah, I think general trajectory, definitely agree. I guess one thing to note is that you mentioned CPI, the headline number was 4% year over year, but the core CPI was 5.3%. So a lot of that decline that we've seen has been really energy driven as energy prices have fallen and they fell a lot this month and over the past year as well.
Mark Zandi: And food, and I guess that might be energy too, because that goes back to diesel and diesel is key to food prices, but that's kind of rolled over here too on a year over year basis.
Cris deRitis: Yeah. Well-
Mark Zandi: Not to the same degree.
Cris deRitis: It's still pretty high though, right?
Mark Zandi: Oh, yeah. And that's another point. Energy prices are down, but all other prices are a lot higher than they were. No doubt about it.
Cris deRitis: Yeah. Food is coming in, but yeah, has to come in more to really help particularly those lower income consumers that are most exposed. So I don't disagree with the path. I think the real test is the speed. Is it going to come in fast enough for the Fed to be satisfied that they can indeed be patient? Or if this continues to slowly come in, do they feel like they need to step on the brakes again and slow things down?
Mark Zandi: Right. Right.
So I was going to say something. What was it? About inflation. And I should ask, are we going to play the statistics game, the two of us? Oh, I don't know. That feels a little weird.
Cris deRitis: That's weird.
Mark Zandi: Yeah, it's a little weird. So maybe we should, if we can. So I won't take anybody. I'm not going to be worrying about taking your statistic or my-
Cris deRitis: Yeah, just go for it. Yeah.
Mark Zandi: Go for it. We'll go for it. Okay. Did you see the University of Michigan survey today? Came out today.
Cris deRitis: I just saw the headline. It was up a little bit, right?
Mark Zandi: Yeah. But what was most significant was inflation, one year ahead inflation expectations. The University of Michigan does this survey every month of consumers. And one of the questions is, what do you think inflation's going to be over the next year? It fell sharply to 3.3%. Right?
Cris deRitis: Wow.
It was pretty good last month. Right?
Mark Zandi: Now, of course, the thing bounces around a lot month to month. So I'm not sure I'd read all of what that would seem to suggest on face value, but it does seem to say that inflation expectations are coming in because, in fact, the peak was back in early 2022. Inflation expectations one year ahead UMich was 5.4. 5.5%. So that seems to be moving in the right direction as well. That's a good sign.
Cris deRitis: It is. But is that just gas prices? [inaudible 00:07:03].
Mark Zandi: Yeah, absolutely. That's key. That's key.
Cris deRitis: Yeah.
Mark Zandi: Right. Yeah. But that's important to wages, right? Because consumer inflation expectations, which is what this is, drives, in significant part, wage demands because workers say, "Hey, you got to compensate me for the fact that I got to pay more to commute and pay childcare and everything else." So that feels like another good sign on the inflation front.
Cris deRitis: Yeah. Okay. Yeah, for sure. For sure. Again, it's just a question of speed in my mind.
Mark Zandi: Okay. All right. I am going to play a little bit of the game with you.
Cris deRitis: All right. All right.
Mark Zandi: Hint, this is inflation. 2.1%. What is 2.1%?
Cris deRitis: That's got to be stripping out some categories. Maybe if you strip out, oh, if you strip out shelter.
Mark Zandi: Yeah. Very good. Just shelter.
Cris deRitis: Oh, just shelter. Oh, okay.
Mark Zandi: Shelter. Take CPI strip out the shelter component, right?
Cris deRitis: Yeah.
Mark Zandi: We're over here. We're at 2.1%. 2.1, and that's two thirds of the CPI index. One third is shelter, two thirds is everything else. Two thirds is at 2.1%. We know shelter costs are going to moderate.
Cris deRitis: But again, you're throwing in the energy in there-
Mark Zandi: But okay.
Cris deRitis: Cracks it down.
Mark Zandi: Okay. But I'm just saying-
Cris deRitis: Take that out as well.
Mark Zandi: But I mean, the shelter component we know is headed south. The rate of inflation is headed south.
Cris deRitis: It is.
Mark Zandi: 2.1 on the rest of it. So it just feels like inflation's moving more definitively in the right direction here.
Cris deRitis: You're right. Core CPI was stubbornly high, but that goes back to vehicle prices and shelter and that is definitely going to roll over. So I don't know. I look at that, of course, as you say, you see what you want to see, but I see a pretty positive inflation number.
Mark Zandi: So you take out food and shelter and you're down to 1% markets.
Cris deRitis: Oh, okay.
So you see what you want to see.
Mark Zandi: You're speaking my language. You're speaking my language. All right. Okay. So that then brings us up to the Fed in monetary policy, and you want to give folks a sense of what happened and how you interpret things.
Cris deRitis: So they paused. Kind of what we expected. So they did not change the Fed funds rate. The dot plots, which are the projections of the members of the FOMC, didn't change quite a bit. So the expectations have come in a bit in terms of ... Well, I guess no. In terms of future hikes, they actually went up. The members are expecting one, two, probably two hikes additionally. Quarter point [inaudible 00:09:49] here.
Mark Zandi: Each?
Cris deRitis: Yeah. Quarter point each. Yep. And then of course, there's the most important part of this is the jaw boning, the actual comments of Chairman Powell. My interpretation is he kind of did what he had to do in terms of saying, we're going to pause now, but leaving the door open, sending a signal that they remain ready to hike as needed, perhaps to try to calm the markets. So that's really the psychological battle that we're in right now with the markets, trying to get them in line with the Fed. So I think my assessment overall, it was a good meeting. I don't think he blew it in any sense in terms of the commentary, which has been the case in a couple of these meetings over the last year. So they're still in a hard place though, right? Or difficult place because inflation is coming in, but it's still quite high.
Mark Zandi: Yeah, I was surprised to see the forecast, the dot plots as you say now, indicating the consensus of the folks on the FOMC, the policymaking committee of the Fed, thinks there's now going to be two rate hikes this year. So we're on the fund rate target, we're a little over five. That would suggest we go to five and a half to five and three quarters. And that wouldn't have been me. I would've said we've seen all the rate hikes we need to see, because inflation's coming in and we know it's coming in with a pretty significant degree of confidence. Labor market's easing. Another data point we got this week, 262,000 initial claims for unemployment insurance. That's the second week in a row. 262 is, kind of, sort of, you don't want to see it go much higher than that. That means layoffs are, now, if that's the actual level of UI claims, that's folks saying, "Hey, I'm unemployed. Help me out and cut me a check." That's pretty close to where layoffs are in a reasonably good economy, you don't want much more weaker than that.
And job growth, it's been strong, but we just got data based on unemployment insurance records is so-called QCEW data, Quarterly Census of Employment and wages, which is what the employment data, the survey data that we look at every month will be so-called benchmarked to, because that's a full count of employment, and that shows weakness. To me, that indicates we're going to see, and it's hard to draw a direct line from that QCEW to what the revisions are ultimately going to be, but it feels like we're going to get some downward revisions in these employment gains. So we're not creating 250, 300,000 jobs a month, we may be creating 150K or 200 K, something like that. So it feels like everything is coming into place with a funds rate target of five and five and a quarter percent.
By the way, hey everybody, I don't know that this banking crisis is over, right?
Cris deRitis: Right.
Mark Zandi: I mean, the next shoe to fall, on terms of credit quality, we're going to start seeing losses on loans made to commercial real estate, to businesses, to consumers. And that's going to start to put pressure on the banking system as well. And we don't know how that's going to all play out in terms of depositors thinking and deposit runs and so forth and so on. So you add that all up, to me, I go, why two more rate hikes? That wouldn't be my forecast.
Cris deRitis: I think it goes to communication.
Mark Zandi: Is that what it is? [inaudible 00:13:32] strategic.
Cris deRitis: I don't know that this is their, in their heart-
Mark Zandi: Heart of hearts.
Cris deRitis: Yeah. Forecast. They're trying to send a message that they're not waffling here, that they're ready to go if inflation should take, maybe these energy declines that we've seen turn around, maybe there's another shock here. They're ready to act. I think that's what they're fighting against because there's this narrative out there that they're going to be weak, they're going to cave. They're pausing now and they'll allow a possibility of a stagnation scenario to develop here. So that's how I interpret it, that the dot plots are really about sending a message.
Mark Zandi: You know what, that make makes sense to me. And I think markets interpreted it that way too, right? Because the stock market initially fell when they saw the dot plot and then by the end of the day was back in the green. And then, yesterday, Thursday, June 15th, we had four or 500 points on the Dow up. Green, lots of green. So it feels like markets are kind of where you are.
Cris deRitis: They don't believe it.
Mark Zandi: Yeah.
Cris deRitis: They don't believe it.
Mark Zandi: They don't believe two rate hikes. Yeah, I think that's right. Yeah. Okay.
Cris deRitis: So you talked about the CMBS. Did you catch the, or you talked about commercial rate estate.
Mark Zandi: Oh yeah.
Cris deRitis: There was the commercial mortgage back securities delinquency rate report came out this week. And that showed pretty significant increase, so we are already starting to see some of that credit deterioration in the CRE markets.
Mark Zandi: Sorry. Yeah. CMBS that's the Moody's data based on the commercial mortgage loans that have been securitized, they tracked the delinquency rate on those loans in the securities, the CMBS securities. That was going to be my game.
Cris deRitis: That was your stat?
Mark Zandi: Yeah.
Cris deRitis: So let me turn it on you. What was the delinquency rate in the month?
Mark Zandi: Oh, you can't go look at your screen. That's not fair.
Cris deRitis: That's my natural. Four and half percent.
Mark Zandi: Yeah. Okay.
Cris deRitis: Right there.
Mark Zandi: The second significant digit, I should have said.
Cris deRitis: Oh, ugh.
Mark Zandi: 4.51. But actually, that's up meaningfully in the month, but it's still incredibly low.
Cris deRitis: It is. It is.
Mark Zandi: Yeah. If you go back in the teeth of the pandemic, it was seven and half, eight. And in the wake of the financial crisis, it was 10, 10%. So it's still very, very low. But although that delinquency rate, if you look historically, tends to move pretty fast. When things go south, they go south fast.
Cris deRitis: That's right. That's right. So this could be the opening salvo, if you will.
Mark Zandi: Yeah. And interestingly-
Cris deRitis: Across the board, right, even apartments got hit. Everything was showing deterioration.
Mark Zandi: Industrial held up okay.
Cris deRitis: A little bit better.
Mark Zandi: Hotels, okay, surprisingly.
Cris deRitis: Yeah. Self storage was actually down, I believe.
Mark Zandi: Oh, was it down? Self storage, okay.
Cris deRitis: People still-
Mark Zandi: It was really office and retail, and multi-family to some degree that got hit.
Cris deRitis: Hit the most.
Mark Zandi: Yeah. Right. Okay. All right. So anything else on the economic data that came out the week or anything else you want to say about the Fed? Here's another thing about the Fed. Can I say one more thing about the Fed?
Cris deRitis: Yeah.
Mark Zandi: I asked you the question, but I'm going to answer it. And I think I've mentioned this before in the podcast, but I just want to say it again and get your thinking. Going back to what the Fed's going to do here, my sense is that once inflation's at three and clearly going to cross a line into the twos, that the Fed's going to relax considerably, because in their heart of hearts, if you ask them what is the appropriate target for inflation, it's not the 2% official number that they have. That was set many moons ago in a different kind of an economy. It's more like three, because if you're at two and you get into a scrap or a recession, you get to the zero lower bound on the funds rate very quickly, and then you start QEing and that's not very effective and no one likes doing that anyway.
So we get to three, why sacrifice the economy to the altar of two when you don't really even believe it? And then the other thing is you've got an election coming, which does the Fed really want to play a role in deciding who's going to be president of the United States? Which, presumably, if they push the economy into recession anytime now going forward, particularly as you move into 2024, that's going to have some really significant political implications. So what do you think of those arguments in terms of what it means for monetary policy?
Cris deRitis: Well, I think we've noted before they cannot possibly say three is the new two.
Mark Zandi: No, yeah.
Cris deRitis: What they can do and what they've already, in some sense committed to, is say it's a 2% average over the cycle. And before the pandemic we were below two, we were struggling to get a 2% inflation rate. So that gives you a little bit of cover to say two and a half is fine, because we're averaging out over time here. So I'd agree that if they see things coming down, if we're on the path, glide path towards lower inflation, then they're not going to risk or have that motivation to hike more aggressively just to get us down to 2% even faster.
I'm not sure though, that they've abandoned 2% as the ultimate goal.
Mark Zandi: Yeah.
Cris deRitis: Because that's so ingrained now that it's-
Mark Zandi: But they become more relaxed about it. Do we have to actually get there by mid 2024?
Cris deRitis: No, no. I don't think so. I don't think so. But again, it's the path. If we're at three and we're gingerly getting down there, we go 2.9, 2.8, it's very slow. I think they're satisfied with that. Do you think they actually cut in that environment?
Mark Zandi: No.I think the bar for cutting is high. I think the bar is high. They do need to get inflation ... I think you're right. They don't want to give up on that target. And they do have some flexibility given the new framework they adopted a couple years ago.
So I don't think they'll do that. I don't think they'll cut until we're at least on a month to month or quarter to quarter basis sequentially around that 2% target. On CPI, that's two and a half, by the way.
Cris deRitis: Yeah. That's right.
Mark Zandi: Construction, differences in methodology. The methodology constructing these two things. The 2% is the core consumer expenditure of flavor, which has different weights and everything compared to the CPI.
Cris deRitis: If we're at 3% inflation, but four and half percent unemployment?
Mark Zandi: Yeah. Because four and a half percent unemployment would suggest that we're probably in recession, right?
Cris deRitis: Yeah. [inaudible 00:20:34]
Mark Zandi: Then they would start cutting, probably.
Cris deRitis: Then they would start.
Mark Zandi: I would think. I don't know, it's a close call.
Cris deRitis: Yeah. Yeah. The bias now is that they're going to shift gears here and start worrying more about the full employment mandate as a guiding principle with inflation, if it goes to script, right?
Mark Zandi: Yeah. I mean, for sub-three and it feels like we're going to two and then you're losing jobs and unemployment's starting to rise. I say, okay, they start cutting at that point. But in my baseline, no recession, unemployment kind of meanders higher, kind of goes to four-ish, something like that. No, I don't think they cut until we're within spitting distance of two and a half on the CPI.
Cris deRitis: Okay.
Mark Zandi: And that in my outlook, that's probably right around the election day. So they may wait till after that. Again, because they don't want to get involved in that kind of debate, discussion, they don't want to be part of that conversation. So maybe December of next year. By the way, we have the first cut in March in our baseline forecast, and I'm kind of thinking maybe that's-
Cris deRitis: Too soon.
Mark Zandi: Too soon. Maybe they wait a little longer than that. Okay. Let's end this part of the conversation, again, with recession probability. So what's the probability of recession in your mind for it starting at some point in the next year? Between now, June of 2023 through June of 2024?
Cris deRitis: And this is NBER defined official recession.
Mark Zandi: Job loss, we're losing jobs, unemployment's moving north of four, headed towards five, that kind of thing.
Cris deRitis: 40, 45% I would say.
Mark Zandi: Oh, really? Okay. That's a little lower. No?
Cris deRitis: Well, I think it was at 40% by the end of the year.
Mark Zandi: And then you were two thirds for next year.
Cris deRitis: Yeah. Okay. I guess to make it consistent should be closer to 50%.
Mark Zandi: But is that how you feel? You don't need to be consistent for me. You can tell me how you feel right now.
Cris deRitis: No, I'm still-
Mark Zandi: I sense a breakthrough here.
Cris deRitis: No, the narrative hasn't changed that much. It's still-
Mark Zandi: 23.
Cris deRitis: In 2023, I don't see it from an official, even if we're starting to lose jobs, it's going to take a while for the NBER to declare recession.
Mark Zandi: Yeah. Two thirds for next year? Two thirds for next year?
Cris deRitis: I would say.
Mark Zandi: Really?
Cris deRitis: It's really that second quarter, second and third quarter.
Mark Zandi: Second and third quarter of-
Cris deRitis: Of '24 that I would say the recession [inaudible 00:23:14].
Mark Zandi: Oh, you pushed this out. You just pushed it out, your recession.
Cris deRitis: A little bit.
Mark Zandi: A little bit?
Cris deRitis: It's the NBER definition.
Mark Zandi: You just pushed it out a couple quarters. You were end of this year, early next. Now, no?
Cris deRitis: That was like two quarters ago.
Mark Zandi: Oh.
Cris deRitis: Hasn't happened yet. You got to push it out.
Mark Zandi: I'm going to remind you, we had a similar kind of conversation back six months ago and we were debating whether recession ... I kept saying, okay, recession, but when and why? That's a very difficult thing to do. A very difficult thing as we are now learning.
Cris deRitis: Yes.
Mark Zandi: Very difficult thing to do. But anyway, okay. I'm growing more optimistic, I'm telling you. I'm going to say 40% probability between now and mid next year. Next year. But I kind of want to say one third, but I'm not going to say it yet. I'm being strategic with this.
Cris deRitis: All right.
40% with an arrow down.
Mark Zandi: Yeah, 40% with an arrow down. I'm feeling better. And so is the stock market. Boy, that stock market's really, of course, it's narrow. Very narrow.
Cris deRitis: Please tell me you're not using the stock market to predict recessions.
Mark Zandi: No, I'm not. But tell me you're not looking at it and it colors your view. Come on. [inaudible 00:24:31].
Cris deRitis: Just forget about it. Better track record. Highly inverted.
Mark Zandi: Well, no, no. But take the stock market and add in the corporate bond market, my friend, and then compare that to the yield curve. Which would you take? Stock market, corporate bond market over here saying no recession, not even close. Yield curve over here saying recession. Which one would you pick?
Cris deRitis: I got to go with the yield curve.
Mark Zandi: Ah.
Cris deRitis: Track record, come on.
Mark Zandi: Okay. Okay. All right. I think we're going to call this part of the podcast quits. But stick with us, we are now going to bring in Mark Calabria. Thank you so much. Talk to you soon.
And it's great to have Mark Calabria here on Inside Economics. Good to see you, Mark.
Mark Calabria: Good to see you, Mark.
Mark Zandi: Really appreciate you coming on. You've had an illustrious career, I think now you're at Cato, right?
Mark Calabria: Back at the Cato Institute. Yeah.
Mark Zandi: And you were at Cato before being director of the ... Oh, you've been-
Mark Calabria: Before I was at the White House.
Mark Zandi: Stop. Because you have such a wonderful career. Can you just give us a sense of that you, your path to where you are today?
Mark Calabria: Sure. And I think it's interesting, from my perspective, it really even goes back to grad school. I finished undergrad in the early nineties and when we, perhaps, first started using that term, jobless recovery in the aftermath of the savings and loan crisis. And one of the reasons I went and got a PhD in economics because the job market was so bad at the time, which is one of those things that has always kept with me. But after finishing my PhD, started National Association of Home Builders.
Mark Zandi: You got your PhD at George Mason, right?
Mark Calabria: Correct.
Mark Zandi: Yeah. Got it.
Mark Calabria: I did my PhD at George Mason. Really, first time I was exposed, I think, in my public finance class, I wrote a paper on Fannie and Freddie is off budget funding-
Mark Zandi: Oh, is that right?
Mark Calabria: ... funding mechanisms. And interestingly enough, Mark Palin, who's the current deputy chief economist there at Fannie, was in the class with me.
Mark Zandi: Who's a better student, do you remember?
Mark Calabria: Probably Mark. I'll give him ... But who's gone on to, obviously, much greater things. So all that said, had an opportunity to really learn the housing industry. I was really more an industrial organization market structure guy in grad school. Actually interviewed with Carl Shapiro for a job at DOJ, because I thought I was going to go antitrust route, which again, I should say, I think does explain a lot of my approach to mortgage finance, really is kind of an industrial organization approach rather than say a macro or housing approach. But again, started working at the Home Builders and got to know people. You know Dave Seiders, Stan Dubinas.
Mark Zandi: Oh, Dave.
Mark Calabria: A lot of that crowd. Dave Crowe was probably really my first big mentor coming out of-
Mark Zandi: Nice man.
Mark Calabria: ... college. So really learned the housing market from those guys. I do not miss spending eight hours a day [inaudible 00:27:42] SAS programs and things like that, so I'm glad to have those days long behind me.
Mark Zandi: Well now you have chatGPT maybe-
Mark Calabria: Yeah, it's true. Or even better at FHFA, had other people to do it for me.
Mark Zandi: There you go. Even better. Even better.
Mark Calabria: But I unfortunately knew enough about it to judge what I was getting. When I was at the Homeowners, I got to know folks at the Harvard Joint Center and they invited me up for a year. Eric Belsky, Kermit Baker, really got to know those guys pretty well and worked primarily on the Remodeling futures project that Kermit runs.
Mark Zandi: I think he just retired.
Mark Calabria: Yeah, he did. Just great guy, learned a tremendous amount from Kermit. And also got to know Bill Apgar and Nick Retsinas during that time. And interesting enough, when I was at the Joint Center was when Nick and Bill switched jobs at FHA and it really was one of the first times I ever thought about potentially public service for myself. Just seeing their involvement in government during the Clinton years. Went on to the Realtors after that, NAR. Spent three years there, but overlapped with my good friend Lawrence Jung, who's still there now. And then out of the blue one day got a phone call from the Senate Banking Committee, then under Phil Gramm. And it happened to be, I should say, one of the members of my dissertation committee happened to be previously the chair at Texas A&M when Gramm was there and it was friendly with Gramm. So it was really just like, "Hey, anybody know an economist who knows anything about mortgage housing markets?"
And so, again, really Paul came out of the blue, went up there, had a great opportunity, for good or bad, depends on your perspective, I guess. Gramm had decided he was going to retire not long after that. So I spent a year at HUD with Secretary Martinez running primarily the RESPA office, Real Estate Settlement Procedures Act. I also ran the manufactured housing program, was the one who created the consensus committee there. Anybody wants to know more about manufactured housing than I ever wanted to. Went back to the Hill six years with Senator Shelby where, again, the topics I worked on flood insurance. So for instance, I'm not sure I like to publicly take too much credit for it, but I'm the father of the mandatory deductible in the flood insurance program. I got that-
Mark Zandi: Oh, is that right?
Mark Calabria: I got that in the law.
Mark Zandi: That's you.
Mark Calabria: Probably get some hate mail from that. But worked on our Katrina response, worked on HERO, Housing Economic Recovery Response and was the primary drafter. So going to FHFA was something special for me because I really was part of the team that created the agency legislatively and really had a lot of attachment to it from wanting it to be a success. I spent five years of my life trying to birth it, if you will, in terms of the Hill. And then I was a bit worn out after 2008 and the process and Capitol Hill started to really get far more partisan. And so quite frankly, I was just done with it, could not go in anymore and deal with it.
So I had an opportunity. Friends I knew at the Cato Institute, spent several years there, helped set up their Center for Financial Monetary Alternatives, helped recruit my friend George Selgin to help us do monetary. Really tried to put Cato on the map in terms of financial reg and monetary. And then out of the blue, I think first week of December, 2016, a friend of mine calls me and ask me if I'm interested in being Mike Pence's chief economist. I had known Pence a little bit but not well. So spent two years at the White House, 80% of my time was taxes and trade. So worked on Tax Cuts and Jobs Act, I worked on USMCA. I worked on our Japan economic dialogue. I had some small responsibility in getting the Japanese to buy more Idaho potatoes.
Mark Zandi: Oh, there you go.
Mark Calabria: My contribution to trade policy. And then, again, financial services, manufacturing, everything across the board. I would describe the job as 80% the role of NEC for the vice president and maybe 20% CEA. We didn't do a separate forecast, but we really were policy making and it was great. My good friend Kevin Hassett and the team, they provided tons of support for anything we ever wanted to do.
Mark Zandi: Because he was head of CEA at the time.
Mark Calabria: Kevin was the chair at the time and really let us know, let me know that the staff would do any work I needed. And it really was a great resource and they were a great team for me to work with. And so as you know, at that time, FHFA was an independent regulator. So you had former North Carolina Congressman Mel Watt was still the director for two years in.
I talked a little bit in the book about the process that got me there and there were actually a number of other candidates for the job in addition to myself. I think simply because many people got to know me and the vice president felt strongly about my nomination. Coupled with the, again, having worked on creating the agency. I came out of the process and feel very lucky to have had the vice president and, of course, Senator Shelby and other support and confirmed by the Senate in April, 2019. Almost two and a half years at FHFA, reminder just about 11 months there before COVID hit, which sort of took over much of the agenda, which is probably true for many of us.
Mark Zandi: Well we're going to talk about that because the book you just mentioned, Shelter in the Storm, is about your experience as FHFA director during that period of time, and a lot to cover there. Very amazing career, actually. Of course. I've been following you for a long time and admired your career. But I didn't realize, I didn't know you were at NAHB, the Home Builders, or at Realtors and quite a career. I met Vice President Pence a couple of times, one time. Very nice man.
Mark Calabria: A super nice guy.
Mark Zandi: I was at an AEI, that's another think tank function. And he was there speaking and we were kind of both off in a different part of the resort area and he just saw me and I was, of course, a little reticent to go up to shake his hand, but he came over and he spent like 15, 20 minutes with me. It was amazing.
Mark Calabria: Whatever you want may think about is his politics, he's just a super nice guy.
Mark Zandi: Super nice. Yeah.
Mark Calabria: Down to earth. He's actually got a sense of humor.
Mark Zandi: That didn't come through when I was talking to him. No, I'm kidding. I'm kidding.
Mark Calabria: No, no, no. Well, I don't often think it comes through. I say it because I think it's perhaps a surprise to some people.
Mark Zandi: A surprise.
Mark Calabria: He actually is pretty engaging in person. I was lucky, I had an opportunity to travel a lot with him. I went to Asia with him in 2017 as part of our Japan dialogue and got to do cool things. I went to the DMZ with him. So you get to do fun foreign policy aspects of it. But we did a tremendous amount of travel for tax reform, listening sessions and other things. So I got to spend a lot of time with him and he truly, in my opinion, just super decent guy, super friendly guy. And I should say as an aside, because you and I share this, he and Karen and the rest of the family, huge pet people.
Mark Zandi: Oh.
Mark Calabria: Love their animals. Cats, dogs, bunnies, snakes, they got it all.
Mark Zandi: Really? Snakes.
Mark Calabria: The son had a boa. I think his son has a boa constrictor. They probably have to keep that separated from the other pets.
Mark Zandi: Yeah, yeah. I'm a dog guy, but I don't know about the snake thing. My wife would lose her mind if there was a snake-
Mark Calabria: Same here.
Mark Zandi: Yeah. So I was going to say one other thing. I can't remember what that was before we moved on. Oh, this is it. I was going to ask you a question. He's running for president, right?
Mark Calabria: Yes, he is. Yes he is.
Mark Zandi: Are you going to be involved in that campaign?
Mark Calabria: Well, I'll do what I can to help him and we'll see how it evolves. Certainly his economics are much closer to mine. So I think, again, his views are fairly consistent with mine in terms of economic policy and I think he would put us in a pretty good place in terms of economic policy. So again, I hope he does well. He, again, has the right instincts in my opinion. I don't think it's an exaggeration to say second to the first lady, there was probably nobody that President Trump spoke to more often and more regularly than the vice president. And they were very engaged in policy and a lot of the big choices, even personnel, and of course, at the end of the day in every administration, the president, that's where the buck stops, the president makes choices. But Pence had a tremendous amount of imprint on economic policy making during those years. And so, again, we'll see how it goes.
Mark Zandi: Well, very cool career. Here we are now that it is very clear you're tried and true Houser, so-called Houser, you're deep into the housing finance system. Let's talk about the housing market right now. What's your sense of things?
Mark Calabria: My sense of things? This is one of the weirdest housing markets in the time I've been following it. So let's touch on a couple of attentions. While, of course, even in the great recession, what was going on in California, Arizona, Nevada was not necessarily what was going on in Texas. But today, I can't think of historical contrast than say the southeast from the west. And so first of all, the markets just seem to be moving in very different directions. Of course, I think the fundamentals do explain that. You look at migration patterns, you look at where people want to move. You look at warehousing is being built. Certainly it's all explainable. But I remember for a long time the conversation, particularly in the nineties and two thousands, was sort of state level economic convergence. And to me, we're seeing a big divergence geographically. That's one. The other thing that really is probably-
Mark Zandi: Which is really, just to make that concrete for the listener, the western part of the US, particularly California, Boise's always been the kind of poster child, down to Phoenix. That part of the country's getting nailed.
Mark Calabria: Absolutely.
Mark Zandi: That's what you mean.
Mark Calabria: West coast in terms of housing prices or where the declines are, you still continue, either out migration or weak migration, weak job growth. And again, just huge difference between what's going on in California. And of course, some of the western markets, it doesn't take a lot of people moving in from California to blow up Boise and it doesn't take a lot of people moving back to deflate it. So a lot of those neighbors of California really got hit. But you're just seeing something very different in Florida, Georgia, Carolinas, it's just a very different housing market. And then the other wrinkle, in my opinion, of what's very different is even though 2008 focused a lot on the foreclosure crisis and on single family, even multifamily kind of mirrored what was going on with single family in the 2000s.
To me, I think we're seeing a big divergence between multifamily and single family. And of course, part of this is that, and I'm mostly talking on the construction side here, but you're having a big degree to which the tightness in existing home sales, of course, because rate lock in has supported single family construction in a surprisingly strong way. Whereas I think we're starting to see and have seen real weakness in multifamily. Of course, this depends on geography too. As I learned at NAR, location, location, location. And they really do differ. So not only are we seeing pretty big geographic differences, we're seeing pretty big differences in terms of market segmentation in my view. And I think it makes it very hard. You continue to see these things going in different directions. I think normally in the kind of pace that we've seen in Fed behavior, you would've expected probably a lot more to break in the housing market that has, so there's certainly been more resiliency in the housing market than I think most of us expected. Perhaps, probably more than the Fed expected.
Mark Zandi: Particularly, house prices, right?
Mark Calabria: Yeah.
Mark Zandi: By our index, we calculate an index, repeat sales, we're down, what, Cris? Two, three percentage points from the peak nationwide, something like that.
Cris deRitis: Closer to two now actually.
Mark Zandi: Closer to two.
Mark Calabria: Yeah. So again, I think it's just been kind of unprecedented to have this degree of tightening with, certainly not zero response in the housing market, but a lot less of a response than one would've expected. If you ask me where am I today compared to where I was a year ago, I'm probably more optimistic on the single family side than I was a year ago. But equally, if not maybe more pessimistic on the multi-family side. But to me, a lot of it does come down to the job market and we clearly have had, since the middle of 2020, people forget. The recovery from COVID job-wise has just been stunning. So to me, the bottom line and takeaway for the housing market is what does the job market continue to do? Because I do think, and this is if you want to get into this conversation, I'm a little bit more on the pessimistic end of the spectrum in terms of what underwriting standards have been.
And to say that I think that mortgage performance and housing performance is much more tightly related to the job market than it has historically been, in my opinion. And so of course, the plus is that as long as we continue to see job growth, the housing market will do fine. If, in my opinion, we see significant job loss, then I think we're going to have trouble in particular segments of the mortgage market and the housing market. I don't think it's going to be systemic by any stretch of the imagination, but they're going to be pockets of distress if we see distress in the job market.
Mark Zandi: So do you have a view on the direction of house prices here or where they're going to go? Our view has been, although I say this with less confidence, is that prices will still move south here. Maybe not as much as we thought a year ago, but still kind of high single digit peak to trough decline. Only because, without that, given where mortgage rates seem like they're going to settle and given the state of the labor market and the incomes, to restore any kind of semblance of affordability in the single family market to get home sales back up to anything that's consistent with long run historical norms, you do need to see some weakening in price and it's going to take some time because you got, as you said, that lock-in effect and we have to wait for life events for people to have to move to actually transact and for prices to come in. But that's kind of our sense of things. Is that consistent with your view?
Mark Calabria: And maybe I differ a little bit in magnitude, but qualitatively, absolutely. To me, fundamentally, where prices are at and where incomes are at in most markets just dictates to me. Sure I would love to see a boost in income that closes that gap, but I think that's unlikely. A, I do think there's a bit of a composition effect here in that what is being sold I think is different than what we may see in a normal market and certainly the heavier percent of new sales. But back to the income point, and I do think that a wild card will be once we start to resume student debt payments. How much stress is that going to put on payments and affordability? And I'm of the view that we should have resumed it a long time ago, but here we are. And that doesn't mean it won't have some drag or negative impact on the housing market.
So I think the thing to really watch is what happens when student loan payments resume. Do we start to see stress there? So again, I am in that where I think probably lower single digits, but some of this also does depend on what inflation continues to do.
Mark Zandi: And mortgage rates, I guess?
Mark Calabria: Absolutely. I'm probably a little bit more on the end of seeing mortgage rates probably normalize around the high fives and the six and I think others may see it perhaps as much as a percentage point lower or so. Again, if we think that the say 10-year treasury's going to normalize around four, than to me, I think seeing a spread of around 200 basis points, which admittedly is historically high, but a lot lower than where we are today. It's kind of where I expect the range to normalize. So I think if we can get to a point where both potential home buyers and mortgage investors, except that we're not going back to 4% mortgages, certainly not 3%, I think you'll see the market kind of pick up. My finance guy aspect is to say, I think there's just a large [inaudible 00:45:45] spread in the market. And once things start to stabilize, I think transactions can pick up again.
Mark Zandi: Yeah, I just noticed some fixed mortgage rates are back up close to 7%.
Mark Calabria: It's crazy. Some of it, a large chunk of it, in my opinion, is just the prepayment risk. And the problem, to some degree, is if a lot of mortgage investors think they're going to make a 7% mortgage and it's they're going to get paid back 4% money in two years. I think if we can get to a point where it stabilizes, say around six and everybody starts to, consensus gets around that, then I think the prepayment problem [inaudible 00:46:22] a great degree.
Mark Zandi: Yeah. Yeah. Okay. My sense is that if you're close to seven then we'll get price declines. If you're closer to six, then maybe things stabilize. That's kind of how it feels out there. Amazing how sensitive, I guess, makes sense with how high house prices are you mix in even a point on a mortgage rate-
Mark Calabria: Makes a huge difference.
Mark Zandi: That's a big difference. That makes a big difference. Hey Cris, before we move on, let me it to you. Anything you want to ask Mark about the state of the housing market or did I miss anything?
Cris deRitis: No, I think you got it right. I think we're not too far apart in terms of, sounds like we're pretty similar.
Mark Zandi: Oh, I did want to ask, Mark, you kind of alluded to this in quick passing, underwriting.
Mark Calabria: Sure.
Mark Zandi: And just as a preface, for sake of disclosure, I'm on the board of directors of MGIC, a mortgage insurer and I'm the head of the risk committee. So I look at credit quality pretty carefully, but you seem to suggest that underwriting-
Mark Calabria: So let me parse that out really quickly where I think I may be an outlier. First of all, I do get a little frustrated when people point to medians or averages because even in 2008, the median loan did fine. The median's got to do fine next time. And of course, we don't all share the same pool of equity. And of course, the overall system was never negative equity, even 2008. So I recognize sometimes you point to the data you have. And I would actually say one of the really biggest surprises to me when I took over at FHFA was how large of the portfolio for Fannie and Freddie is rock solid. So there's a big chunk of it that will perform in almost any circumstance, but there's also, in my opinion, probably a five to 10% tail risk. Most of that tail risk in my opinion is actually not in Fannie and Freddie, it's an FHA. And the couple of metrics I'm worried about, one, I think that there has been significant, what I call FICO inflation, and I would compare to say 2005.
I think the typical FICO score is probably about 25 points higher than it would be pre-2005. Part of it even goes back to before 2005, the 2003 Fair and Accurate Credit Transaction Act. I happen to be on the banking committee when we did, but even the post-2008 CFPB changes, so, A, regulatory changes and then coupled with the decline in reporting activity for negative events that went on during COVID really kind of leads me, and again, it's hard to quantify, but my back of the envelope is 20, 30 points of FICO inflation have occurred. And I think most of that has actually been at the bottom end. People who are 850, were going to be an 850 otherwise. But, so I think FICOs are inflated. I do worry that DTIs are very high.
Mark Zandi: Debt to income.
Mark Calabria: Yes, debt to income. And what we saw internally was the number one predictor of who took COVID forbearance in the Fanny and Freddie book was debt to income. And so I do worry that if you get job loss, this is why I go back to my point. A lot of this rides on the job market and if the job market remains okay, we'll be okay. But if the job market stumbles, I think you've got a sliver of high DTI, low FICO, high LTV borrowers who will have trouble. And that worries me, and I think it'll be more significant than is commonly recognized.
Mark Zandi: That's consistent with our, Cris has written a lot about the score inflation, which has actually shown up in the credit card and unsecured personal lending already, you can see high delinquency. And I think ... Go ahead.
Mark Calabria: I was going to say, I'm glad. Because my takeaway too is from, A, having looked at the factories, but talked to a dozen or so people in the industry and nobody really seems to want to go on the record, so I'm glad you guys-
Mark Zandi: Oh yeah. And you can already see it in the FHA book. You can feel delinquencies are already rising pretty quickly and that's at a 3.7% unemployment rate.
Mark Calabria: Yeah, and I do worry, they haven't said what they're really how they're going to report this, but as you know, there's a proposal to have a partial payment where they would essentially take money out of the fund to make borrowers current again without actually the borrower themselves having paid-
Mark Zandi: I hadn't heard that.
Mark Calabria: It's not quite being finalized yet. And of course, it's supposed to be similar to the payment deferral option that we created at FHFA, but it's not clear how it would be reported. And for good or bad, at least in terms of an information, FHA delinquencies are, to me, the canary in the coal mine, they'll go bad before anything else in the mortgage market does. And I do worry that we may be seeing kind of a lessening information value of FHA delinquencies. But again, if they report to us how many of these partial claims they're doing, then we shouldn't be able to backend the numbers out. But it's just not clear yet.
Mark Zandi: So we've talked about the present. I want to now go to the past in your book, Shelter in the Storm, and I'm not sure we're going to get to the future, Mark, which is also really kind of critical.
Mark Calabria: We will eventually, right?
Mark Zandi: Yeah, yeah, yeah, yeah. But I'm going to just get this out there right away and get you on the record says saying, Yes, I want you back. If that's okay?
Mark Calabria: I'm happy to come back and talk about what tomorrow may hold.
Mark Zandi: Okay, because there's-
Mark Calabria: Mortgage finance policy.
Mark Zandi: ... a boatload of stuff to talk about. Fannie, Freddie, Conservatorship, Federal Home Loan Bank system. I just wrote a paper that-
Mark Calabria: I've heard.
Mark Zandi: Jim Parrot, yep, at Urban. But let's talk about the past and the COVID experience. And in the book you wrote, and let me say, as I told you before we signed on, I thought the book was very well written and enjoyed it very much.
Mark Calabria: Thank you.
Mark Zandi: I did notice my name. I was mentioned once in the book and I felt pretty good about the forecast. I still do, but that's okay. That's beside the point. We don't have to talk about that. But I think, I'm not sure exactly where you'd want to begin, but I thought, and you said that the book is to some degree addressing some of your pet peeves around what happened during that period.
Mark Calabria: [inaudible 00:52:53]
Mark Zandi: Go ahead. Sorry. I was just going to say, the one thing that kind of top of the list I think, tell me if I'm wrong, is around the criticism you received around helping the mortgage servicers. Is that correct?
Mark Calabria: It certainly was something where it was probably most in my mind when I started writing it. First of all, the top level message of the book, it was mentioned at the beginning. I was on the banking committee in 2008. I had very strong feelings and I did mortgage oversight about how programs like HAMP and HARP functioned and where I felt they fell short. And so the biggest theme of the book is, here's the things that I really didn't like about the 2008 response, and if by chance I would be in a position to do something about them, and as fate would have it, I was, why we did it differently this time and why I think that was a success. And then to kind of raise the question of, what did we do that made sense solely because it was a pandemic that may or may not make sense in the future because we will have recessions again, even if we don't have pandemics. Let's hope not. And then what are the things that should stay and to have that conversation and also to go through the why.
One of the things that's been very interesting is a number of particularly industry people have read the book and said to me, now I know why you did that. Of course, I had hoped to have been fairly transparent at the time, but I do think it's a good precedent for policymakers coming out of government to explain their actions a little more in depth and why they made certain choices. And that's the biggest thing. These are all choices that were made and I wanted to help people understand why we chose A rather than B. Certainly, I don't know if fun's the right word, but one of the more interesting parts of writing, it was going back and reading some of the very gracious things that were said about me in the press.
Mark Zandi: I saw that. By the way, I wasn't one of those guys.
Mark Calabria: And you're not. I always respected that even when you and I disagree, I've never thought you've made it personal.
Mark Zandi: Appreciate that.
Mark Calabria: And I don't really felt like you've ever, and certainly, I apologize if you feel like that I've ever been questioned you.
Mark Zandi: Mark, you're too nice a guy. I mean, come on. It's impossible.
Mark Calabria: Well, and to me, I think we're both, you and I, this could be another episode, have very different models of how the economy works and maybe different assumptions. But I think we're both trying to get through how does the world actually work, we're trying to get to the end of this. We're trying to understand what works. And to me, when people engage in ad hominem and personal attacks, it's really just more an indication of the weakness. The reason that I repeat some of that stuff in the book is I want people to understand, especially now it's timely with SVB, First Republic, all these things that I've been in this seat where 99% of the phone calls and pressure you get is, rescue, rescue, rescue. And I wanted people to understand that that's what you get. That is the pressure. That is the situation.
There's almost nobody who calls and tells you, "Well, maybe we should go slow and think this through." That's not how it ever goes. And so one of the more frustrating aspects, because we were rather generous, and I do talk about how we set up the programs and probably the biggest change was really to let borrowers simply state their distress as I call it, the honor system. Because to me, one of the real problems in 2008 was the paperwork shuffle that we took borrowers months and months to get in. Some borrowers, some lenders submitted fraudulent, some stuff got lost. So I looked at this and said, "We're in the midst of a pandemic. We can't afford to set up a program that takes borrowers five months to get in. That's not an option. That option is off the table." And because we also didn't needs test it, which I think is actually an important aspect of it, we made it easy to get in.
Now, these programs are set up before the CARES Act, and our intent had always been to get you in and then call you three months later and verify. It wasn't going to be your in and that's it. It was going to be get in and we're going to do the verification on the back end, not the front end.
Mark Zandi: And just quickly, the CARES Act was the first piece of COVID relief legislation passed under President Trump in March of 2020. I think it was 2 trillion, something like that.
Mark Calabria: Yeah, that's right.
Mark Zandi: 2 trillion deficit financed. And the support was 5 trillion all in.
Mark Calabria: Yeah. We spent a lot. We spent a lot.
Mark Zandi: Spent a lot. But this was 2 trillion and there was a lot of other things going on.
Mark Calabria: And I think that was also the PPP was probably the biggest component of that.
Mark Zandi: Five, 600 billion of that was PPP. But that was for small business.
Mark Calabria: Exactly. And so the CARES Act also codified a lot of what we had already set up. And I talk about the pros and cons of putting codification. So because we were essentially invoking the honor system, which of course, I tried to be candid in the book about what were gambles, what were the uncertainties. And so there was a tremendous amount of debate about, well, if you make this easy to get in, everybody will take it. And that certainly was a possibility. We thought, however, as we economists would say, we would make it incentive compatible. We would make it easy to get in, but A, we would be stingy. We weren't forgiving. It's easy to forget that there were broad calls for mortgage forgiveness, rent forgiveness. Of course, I had no money to do that even if I wanted to. But A, we were going to make it very clear that it's easy to get in, but you were going to pay everything back.
And then we created some carets. So for instance, normally, if you take some sort of mitigation forbearance in Fannie and Freddie, you have to make 12 on time payments before you can refi. So we created big carets. We said if you were always paid throughout your forbearance, you can immediately refi upon exit of the program. And then if you had missed payments, all you need to do is make three on time payments to be able to refi. So again, we created some stakes, we created some carets to try to modify how generous we were on the front end. But because of the generosity on the front end, there was a lot of concern that the mortgage servicing community, just the non-banks, I guess I should emphasize, would come under stress and fail.
Mark Zandi: Can I stop you just very quickly?
Mark Calabria: Sure.
Mark Zandi: Just to bring the listener up to speed. So the mortgage market, currently, I think 75, 80% of all mortgage loans that are being originated, and that I think it was roughly the same back in the pandemic, are made by so-called non-banks. These aren't your traditional banks, these are independent mortgage bankers. And these institutions are generally smaller. There's some big guys, but there's a lot of smaller ones. And the concern was at the time that because of the foreclosure mitigation efforts, these servicers that are servicing the loans, these mortgage banks had to continue to provide the payment to the investor. So they were shelling out cash, but they weren't getting mortgage payments from the borrower. Therefore, they're stuck in a hard place. And therefore, now, I'll turn it back to you.
Mark Calabria: And much of the concern, I should say, the book kind of walks through quickly how we got to this. And again, [inaudible 01:00:35], we have a very, very different mortgage market today at 2020 than we did pre-2008. And while some of these non-banks are large in terms of volume, they all tend to be rather small in terms of balance sheet. And so the real question was their cash, because again, there are a significant number of depositories who do servicing. But A, as we remember, massive amount of inflows and deposits that weren't the same sort of liquidity concerns. They had a balance sheet. So it really was kind of limited.
And so to me, if I can put this into three variables that I think were, some were known, some were not known, or at least some were known to us and not known to the rest of the public. So whether there's got to be stress, and of course, the question of whether stress would be systemic or would be a small number of institutions, first of all, what are actually take up rates going to be? And we had put together, I'll say as an aside, perhaps, one of the most shocking things to me about FHFA when I started in April, 2019 was there was no forecast function. There was no housing price forecast function, no housing market, no macro forecast function. And so I hired Lynn Fisher.
Mark Zandi: They got that from us, Mark.
Mark Calabria: Well, they got it from Fannie and Freddie who might have got it from you, but-
Mark Zandi: No, no, I'm joking.
Mark Calabria: The view is not that you don't look at what other parties say, but you also have your own internal view. So I had hired Lynn Fisher to set that up. And we were fortunate that that new division of research statistics opened its doors in January, 2020. So by the time COVID had hit, we'd gotten that staffed and we had a pretty good model based on previous recessions, what we thought forbearances would be for the Fannie and Freddie book, given where we thought stress in the mortgage market would be and the labor market, and given the quality of the book. And my opinion, it turned out to be quite accurate. In March, I think I was on TV with Diane Olick, and Diane asked me, where were you going to be? And I said, "Diane, I think we're going to be around, in the Fannie and Freddie book, around 6% in middle of May. And lo and behold, we peaked around 6.7 in the Fannie and Freddie book. Of course, FHA and others were worse. So A, we had a pretty good forecast model. Now again-
Mark Zandi: Just one more, just to catch people up because you know this, I know this, Cris knows this.
Mark Calabria: That's fair.
Mark Zandi: Yeah, we're moving fast. So we're talking about the mortgage banks, the mortgage servicers, and the question is, how big a problem this cash problem do they have?
Mark Calabria: Exactly.
Mark Zandi: And you're saying, okay, first thing to consider is, well, how many people are actually going to take up the forbearance, the mitigation, because that's going to determine the size of the problem and therefore that's what you're talking about.
Mark Calabria: Absolutely. So first variable is what's uptake among borrowers? That's the first variable. And that was probably where there was the widest range. And again, we had, I think even our 95% confidence interval suggested it wasn't going to get above 15, 20% worst case. But that's the first variable. And that was where I would say most of the public debate was. The next two variables, there was less public debate, largely because we had information that others did not. And so second variable is, who actually bears the burden? And so for instance, I mentioned earlier there's significant number of depositories that are servicers, but I think less recognized is that about 40% of the servicing responsibilities for the Fannie and Freddie book rest with Fannie and Freddie. So for instance, and if you go to the cash window and sell a loan, Fannie and Freddie take over the advanced responsibilities.
There are contracts who you can choose as a servicer to essentially buy insurance from Fannie and Freddie on the servicing front. So all this said, only about a fourth of Fannie and Freddie servicing advances were the burden of non-banks. So a lot of people would scope out, here's the market, here's how bad it could get. And of course, pre-COVID, Fannie and Freddie limited non-bank services to four months obligation. We were in the process of aligning that. So the second variable is, how much of, A, the take up is the responsibility of, B, the non-banks? And we started sharing that information, and it's understandable.
Probably one of the hardest things I had to go back and forth describing the book was exactly how remittance schedules work for servicers.
Mark Zandi: I read that. I thought it was well written. Yeah.
Mark Calabria: Well, thank you. Because it's not necessarily the most transparent issue. And it really was an extremely important part of the issue. And then the last variable was how much resources do the non-banks have. And so we had, at the time COVID hit there, I think there were 346 non-bank servicers that Fannie and Freddie did business with. We had income statements, balance sheets. We immediately got on the phone with the largest 30, and the servicing industry is rather concentrated, so the largest 30 got us probably 90% on the market. And we immediately said to them, "I've got your financials. Is this up to date? What has changed?" And then lastly, also, while on those phone calls, not only did we ask what is your current status, we also asked, what is your capacity to absorb servicing from others?
So we had an internal metric of this is how much servicing we could transfer before there was really any risk to stress. And so again, I think the public debate was over the first variable. We tried to get both the capacity for the industry and the burden of the industry. I made public in a June, 2020 testimony and we had tried to get some of that data out earlier and sharing it to try to have a sense of people of how good or bad this was going to be. And then we tried to work with the industry to get there. First of all, as I said once before, the situation at FHA and Ginnie was far worse. And in fact, most of our concern for Fannie and Freddie servicers was not the servicing of their Fannie and Freddie book, it was for those servicers who also did Ginnie, that there might have been kind of a knockoff effect.
And so for us, we just never, maybe at any one time, there were a small number of servicers. And while I don't name names, you can probably do a little Googling if you get the description of the book. There were two large servicers who had private equity parents. And I'm actually not in the current vogue of being anti-private equity by and large. I think it serves a useful function, even if it's got some flaws. But there were these two private equity owners of these two servicers had taken out literally billions out of these companies in 2019. And of course, investors take money out of companies. There's nothing necessary nefarious about that. But when these companies had come to us and wanted Fannie and Freddy to provide them funding.
We reminded them, you guys just took a lot of money out of these companies and if you get into trouble, we'll transfer the servicing to someone else. So if you would like to maintain the value of those platforms, you might want to put money back in. And then once they figured out that we were serious, they put money back in. And those platforms are around today performing value. And a theme of the book really is this kind of argument and debate about what should be the threshold of response to providing assistance. And not to sound like a lawyer, but my approach is it's a rebuttable presumption against assistance from where I sit, but it can be rebutted, you can provide enough data and evidence. And we were very clear throughout that time that, show us the data you're looking at, tell us what you see that suggests this is necessary. Which is very different than I think kind of the conventional view of, when in doubt, bail it out.
Mark Zandi: That's a really important broader point you try to tease out. You're saying, Hey look, generally when we get into a scrape, a crisis, the immediate reaction is for government to come in and backstop. And of course, at times that's absolutely essential. But in this time, in this particular case around the mortgage servicers you're saying, "Look, I didn't do that. And it turned out okay, no problem. The servicers kind of navigated through, they managed through and I didn't need to bail them out." But let me ask you a question around that.
Mark Calabria: Sure.
Mark Zandi: And this goes to the forecast I did, effectively, on the take-up. I assumed that policy that we were going to see in response to the crisis was the policy we had, that I didn't count on 5 trillion, who would've thunk $5 trillion in support, UI and food and student loans and on and on and on, PPP. And also, the Fed's response was also pretty amazing. Zero lower bound, massive QE. In fact, you mentioned the refi boom in your book, [inaudible 01:09:55] a whole chapter on it. You saw mortgage rates go from three and a half to four before the pandemic to a record, believe it or not, two and a half percent. Unbelievable.
Mark Calabria: Insane.
Mark Zandi: Insane.
Mark Calabria: Just giving money away.
Mark Zandi: And of course, the economy, as you said, amazingly turned around. So to my perspective, one reason why you didn't have to step in, why the mortgage servicers kind of navigated through is because they did get bailed out by everybody else.
Mark Calabria: So it's certainly a reasonable argument to say everybody got bailed out. And of course, I suspected, you and Cris struggle with this on a daily basis, which is kind of teasing out causality from correlation. Now, as I mentioned, we had built a model in early March, our econ team, looking at historical performance. And of course, that historical performance embedded. So we did expand unemployment insurance benefits in the Great Recession. So there are some policy responses that, yes, they weren't as generous as they were this time around. And I know I'm an outlier to say I'm not of the view that we were stingy on the fiscal side in 2008. I'm of the view we spent a lot of money and we helped a lot of people. We just structured it. I'm more of the Casey Mulligan view that we structured those programs in a way that disincentivized work.
But all that said, certainly our forecast incorporated previous policy responses. So we certainly didn't take a baseline of government will do nothing. But we did take a baseline arguably of the response will be similar to perhaps the Great Recession response, which again, in my view was generous. So all that said, the trying to tease this out and say would it have been worse? How much worse and some could say are 95% confident-
Mark Zandi: But just to put a point on that, in the Great Recession, because we've obviously, I've done a lot of work in this area, the total fiscal response to the Great Recession was 10% of GDP. I'm rounding, obviously. The fiscal response to the pandemic was 25% of GDP.
Mark Calabria: So much, much more than would've been what normally expected. And so certainly, our modeling efforts that suggested that we were going to see single digit forbearances, you could say incorporated say a 10% fiscal response. And I think it is an open question. I certainly am a believer that fiscal response does at some point have diminishing marginal utility. So I'm not convinced that 20% is twice as good as 10% in terms of a fiscal response. But all that said, parsing through, would it have been different. And, like I said, the financial data we had, such as who was going to bear this? What was the uptake? I personally think the probably biggest thing that really drove, and again, you had your forecast and I guess I could turn the question back to you with my observation or rather the internal data we had that only about a quarter of Fannie and Freddie servicing responsibilities was with the non-bank. I'm assuming-
Mark Zandi: That's a great point-
Mark Calabria: I'm assuming that had to be new to you.
Mark Zandi: Oh, that, yeah. Of course, I didn't take the next step and say, you should provide support to the servicing industry. I didn't take that step. I just did the first step. Variable number one, variable A-
Mark Calabria: Which, of course, is why we created the forbearance and why we set that up. So again, it was very surprisingly large number. I think on one end, I think about 15% of Fannie and Freddie forbearance borrowers took it for a month and left and probably about a fourth took it for three months or less and left. So a lot of people took it, got back on their feet. Obviously, there were a lot, I think less than 1% of Fannie and Freddie forbearances had LTVs over 97. And that's part of what went into our modeling effort as well, which is these borrowers are in pretty solid shape. But again, it's obviously very hard to parse out what was the econ a wide response of the massive amount of stimulus we provided. And of course, how do you parse that out from just the arguments over how much of inflation is fiscal versus monetary. That's what you macro guys try to figure out.
Mark Zandi: Yeah. Yeah. That's my favorite debate now.
Mark Calabria: And it's not easy.
Mark Zandi: So it makes it fun. Hey, I know we're running out of time and I want to respect your time. I do want to ask one more question around the mortgage servicing now looking forward perspective. And that is, there's a lot of concern, worry, and this was also brought up in the context of Silicon Valley Bank and Signature and everything else, that these institutions are financially fragile in the sense of the funding. They rely on warehouse lines with JP Morgan Chase. I'm just making that up, the big guys.
Mark Calabria: Chase is into warehouse lenders [inaudible 01:15:09]
Mark Zandi: Yeah, yeah. This is an example and they can get into capital markets and erase some debt, so forth and so on. But the funding sources are somewhat tenuous when you get into a risk off environment. And if they were to get cut off from the funding and that meant the mortgage market, because they are 75, 80% of originations, would be significantly impaired, because that would hurt the housing market significantly. And obviously, that would be a pretty significant threat to the economy. In that context, first of all, am I characterizing this correctly? And second of all, what should we do about it, or anything?
Mark Calabria: Great question. So on one hand, I don't think any one of these institutions is systemic in the sense of that we could not resolve its assets in a way that would made disruptions to the economy mortgage market.
Mark Zandi: Absolutely.
Mark Calabria: So for instance, we had in the fall of 2019, Ditech, a rather large servicer who went through a bankruptcy court in New York and we transferred its servicing to New Res. And there were bumps, but partly because you had to deal with the court, not because of the process itself. And so Fannie and Freddie have a large history. There's even the ability, we can take a failed, or Fannie and Freddie rather, I should stop saying we, Fannie and Freddie can take a failed large servicer, essentially cram down the balance sheet, turn it into a sub-servicer without firing any of the employees. So you can take all the people that are there and just redo the financial side of the company where, of course, the current owners are out, but you've got all the same infrastructure and these are things we walk through and that we stress test. So all that said, and you don't really want a whirl-
Mark Zandi: But that's not the scenario. The scenario isn't one guy or five guys, it's like 50 guys, 500 guys get cut off all at once because we're risk off, big time risk off. What happens?
Mark Calabria: It certainly is a concern. And again, one of the things we did see was that the bank regulators, particularly the OCC, were very, very hostile to any extensions of further lines of credit during COVID to the non-banks. And this is what we saw in 2008. And quite frankly, every crisis you will see regulators kind of circle the wagon of the institutions they regulate. Your problems are your problems. My problems are my problems. That's how it will work every time, and we're naive if we pretend otherwise. And so yes, the fact that many of these institutions are extremely reliant on warehouse lines of credits and depositories that can get yanked or not get extended is a real fragility. And part of the reason I thought it was important to write the book is there are really numerous weak parts in our mortgage finance system that we should be concerned about.
Now, of course, I think we should go back to more of an originate and hold depository model. Not that there's not problems there.
Mark Zandi: Another podcast, Mark.
Mark Calabria: It's always a matter of picking the least bad option when it comes to the mortgage finance system, so I share the concern. I would rather see us try to find a way to get depositories back into this business. And I talk a lot about the non-banks and the fragilities in that sector in the book. And it is really worrying to me. Again, I don't think the approach should be, we bail them all out. I think, because this is what frustrates me with the kind of when in doubt, bail it out. I think you and I both agree that there's some degree of moral hazard created which results in perhaps [inaudible 01:19:00] leverage. And of course, we always say in Washington, well, we'll come in and we'll put regs in on the backend and we'll fix all that.
Well, that rarely ever happens in an effective manner as proven by SVB and other institutions. So to me, I take moral hazard very seriously. I am extremely skeptical having been inside the regulatory process at our actual on the ground ability to control it. And so I worry that ... One path we could have gone down would've been to provide 13-3 Fed assistance to the non-banks and then created some big regulatory infrastructure around non-banks. And I think it would've left the system actually more vulnerable in the long run, not better. And it would've left us with federal ownership of this issue. And of course, it would've been better for those non-banks. But the solution to having regulated depositories out of the mortgage market is not to regulate everybody else out of the mortgage market.
The solution is to come up with a better mortgage finance system. And we can leave it there and say, a big takeaway from the book is, we have a lot of problems in our mortgage finance system to some regard, whether it, as you've mentioned, large amounts of assistance that were provided by COVID that allowed us to dodge some bullets. There's a lot that needs to be fixed and a lot that needs to be done is certainly a big takeaway from the book.
Mark Zandi: Yeah, it was a great book. Recommend it to everybody and definitely want to have you back to talk about the future of Fannie and Freddie and the Federal Home Loan Bank system. I will say, I just got a notice, no joke. It says a tornado is coming and we should go in the basement. I'm not kidding. I'm not kidding.
Mark Calabria: I don't doubt it. I don't doubt it.
Mark Zandi: [inaudible 01:20:50] You got it too? That buzz you just heard.
Mark Calabria: Yeah.
Mark Zandi: Maybe we should go to the basement.
Mark Calabria: Let's do some risk management here.
Mark Zandi: Let's do some risk manage. Yeah, there's no question about this. So Mark, we're going to, I think it ended here.
Mark Calabria: Yeah.
Mark Zandi: Thanks so much for spending time with us and explaining that. And again, I recommend the book to everyone out there. Shelter from The Storm. Shelter from the Storm. Great, great title and we'll talk to you soon.
Mark Calabria: Thanks. Be well. Be safe.
Mark Zandi: Be careful.
