AMERICAN PREDATORY LENDING AND THE
GLOBAL FINANCIAL CRISIS
ORAL HISTORY PROJECT
Interview with
Faith Schwartz
Bass Connections
Duke University
2020
PREFACE
The following Oral History is the result of a recorded
interview with Faith Schwartz conducted by Clare Holtzman on July 8, 2020. This
interview is part of the Bass Connections American Predatory Lending and the
Global Financial Crisis Project.
Readers
are asked to bear in mind that they are reading a transcript of spoken word,
rather than written prose. The transcript has been reviewed and approved by the
interviewee.
Transcriber:
Clare Holtzman Session:
1
Interviewee: Faith Schwartz Location: Virtual
Interviewer: Clare Holtzman Date: July 8, 2020
Clare
Holtzman: I'm Clare Holtzman, a
J.D. Candidate at the Duke University School of Law. I'm also a research
assistant for the Global Financial Market Center's American Predatory Lending
Project. . . . [I]t is Wednesday, July 8th, 2020. I'm conducting an oral
history interview with Faith Schwartz, currently President of Housing Finance
Strategies who has joined me through Zoom. Thank you for joining me today.
Faith
Schwartz: Sure. It's nice to
be here.
Clare
Holtzman: I'd like to start by
establishing a bit about your background. I believe that you received your
Bachelor's in Science and Business Administration from Shippensburg University
of Pennsylvania. Is that right?
Faith
Schwartz: Yes.
Clare
Holtzman: After college, you
then completed an MBA at the University of Pittsburgh, correct?
Faith
Schwartz: Yes.
Clare
Holtzman: In the context of
your work life, when and how did you first become involved with residential
mortgages?
Faith Schwartz: So I've been involved in
residential mortgages most of my life, most of my career life anyway, since
1983, where I started out working for a bank-owned company called Dominion Bank
Share's Mortgage, where I ran, kind of, their secondary and capital markets securitization
group, as well as their wholesale purchase programs where I would actually buy
loans from other banks or mortgage companies. And that was the first 10 years
of my career. And then I either worked for small growing companies, some of my
clients, I was a limited partner in a few of them. And then [I] ended up at
Freddie Mac, after some of those efforts, where I got quite involved in kind of
advancing the anti-predatory lending mantra…. So, I became quite familiar with
market standards, use cases, and those types of things.
Clare
Holtzman: Going back a little
bit, can you talk about what TMC Mortgage and Fieldstone did?
Faith Schwartz: Sure. TMC was a small builder-owned
company that reconstituted itself, and I used to buy all of their Fannie,
Freddie, and Ginnie Mae loans. So, when I left Dominion, I was their COO and
kind of set up the company, grew it and originated or purchased up to about a
billion dollars a month—or actually a year I think, it was a long time ago. But
it was my second real job and we sold the company four years after we grew it—
myself and the CEO and some limited partners—and kind of merged it with two
other big mortgage companies. I’m trying to think of the dates, but it was the
early nineties—so probably 1994 or
93. And I was recruited by Michael Sonnenfeld to work for Fieldstone, which was
an aggregator from Wall Street, a conduit-related company to enter into the
subprime market, the alternative markets. And I was there for gosh, about two
years. I again was over on the capital market side, kind of a COO role of operations
and capital markets. But it was my first exposure to HOEPA [Home Ownership and Equity Protection
Act] and high cost mortgages and different
things. And frankly, I didn't like it too much. So, I ended up being recruited
to go to Freddie Mac to help them understand the broader markets. So, I was
there for a fairly short time, but I learned a lot, which is very helpful to
understanding how really bad things could be in the manufacturing of a loan,
but also the wide variety of what was going on outside in the marketplace. So
that was . . . more of a conduit, it had set up some branches, but the idea was
to sell to Wall Street, you know WaMu (Washington Mutual) or even Household [Finance] at the time was an aggregator of mortgages, a handful of
kind of outlets who this company ended up selling to.
So, I
believe I was there for maybe two years, but I was pretty clear I didn't want
to be there. That was probably of all my jobs, the one I least enjoyed, but I
learned a lot. And so then I went to Freddie Mac to set up a pilot on
alternative markets or the subprime market to understand the sourcing risk, the
different products, what was different about aggregated deals, and what kind of
loans were packaged in these securities that were not typical Fannie Mae,
Freddie Mac mortgage backed security loans….
Clare
Holtzman: Now I know that on
your resume, I saw that you talked about working with alternative markets.
Could you describe what alternative markets were?
Faith Schwartz: Yah, it was just another way to say if it didn't fit into
a Fannie Mae kind of general underwriting guideline, it started slipping out. And
in the nineties, there was not a lot, I'd say it's in this 10% to 12% range,
maybe, where mortgages were being made outside of traditional Fannie Freddie,
FHA (Fair Housing Act), VA (Veterans Affairs) guidelines. In fact, FHA had
fallen to a very low percentage, but mostly because of their manufacturing
process and how they insured loans back then, they were losing a lot of share—and
even the GSEs (Government Sponsored Entities) were [losing market share]— to
private label securitization. So, the GSE at that time, Freddie Mac wanted to
study that more and understand the risk that they would take if they ever made
those credit risks, because they were loans, and at the time it appeared they
were performing well. But with the constant increase in house values and other
things, if people got in trouble on the mortgages, they would just refinance
into yet another mortgage, as you well know.
So, we studied that for a little
over three years, it was a pilot. And what we did was we picked a number of
different aggregators and originators in the market and we took a credit
investment grade risk where we'd wrap the security with a Freddie Mac, we
called it a “T deal.” And then we would study the data. So, the people that
issued the securities would actually need to share with us the loan level data,
so that we could study and understand what the loan was, how it was originated.
So, it was kind of captured in the securitization, but we went deeper. We studied,
kind of like a rating agency would, we studied the origination and servicing
risk of the counterparty, so we had an audit team. We got to know the segment
of the market and why these loans would fall into this segment versus a
standard Fannie and Freddie loan, like what they'd call A or even a slightly A-minus,
they might have had a credit blemish but they fell immediately into this other
segment of the market.
So, this was
early on, this was in the nineties. So, this was quite different than even the collapse
of the subprime market, believe it or not, in that it was more cashflow, it was
more—it's just a different time. And while it wasn't dominant, it was growing,
and so, everyone was paying attention. And so, it really was a pilot. And we
did that and decided not to take credit risk for the loans themselves at
Freddie Mac during this time—meaning low level credit risk— it was much higher
level. And, [we] actually backed out away from that market, and then I spent my
time with some of the banks, because I [had] kind of grown up in the prime side
of the business. So, I was working with a lot of the big banks on the East Coast
after that at Freddie Mac.
But what's
most interesting and probably relevant to what you're doing is we learned
something really important. And I think it's important to get into your
research. I was very proud to lead their anti-predatory lending efforts, which
meant we had to step back and say, what are we doing to promote practices in
adding liquidity through our securitization. And by the way, this is on prime
loans or subprime, right, it wasn't just subprime. And what we realized is they
had things going on that we didn't like. And we said, well, we shouldn't buy
securities if the originators are doing things that aren't consistent with what
should be done across the whole mortgage market. So, we announced three pretty
big policy changes that frankly, the prime market, the banks, and others didn't
love at the time because we found that, even in rural markets or different
places, people were using products and programs that were not suited for
consumers.
So really my
awakening and engagement to fight predatory lending really is the result of
that research and the work we did at Freddie Mac. So, reporting borrower's
credit, good or bad, on a regular basis so that brokers can’t churn them. Like
people didn't report them because they thought it was a refinance barrier and
people would look at the borrowers so that a lot of subprime people never were
reported to the credit bureaus. So, if they were making their payments, they
never got credit for it in the credit bureaus. So, you may be aware of that.
Well, that was a pretty bad practice. And so . . . in my role at Freddie Mac,
we announced we will not offer any liquidity, we won't work with any company
that does not report all loans to the credit agencies. We had several companies
that had to change their practices.
So, we felt influential and positive about what we were
doing for borrowers in that place, and we thought it was predatory if they
weren't reporting that. Another thing we did was we felt mandatory arbitration was
a bad thing, so we worked hard to eliminate mandatory arbitration. Prepayment
penalties of five years were another really difficult issue, which meant if you
had a two-year adjustable rate mortgage and it adjusted upward in two years,
you typically got a big interest rate shock. And so, often you had to pay this
enormous penalty, of a five-year prepayment penalty, when the average life of
these loans was often two years, because when it was going to adjust, they
would refinance into yet another mortgage. So, without getting into too much
detail here, that became kind of an equity stripping issue. If you're paying an
$8,000 fee or a $10,000 fee every time you refinanced to pay off the prepayment
penalty, it's highly likely you're going to owe—that's just another way to
strip equity and take away from the borrower’s wealth.
So, what was
not obvious to me then [but] became more obvious to me over the years is that
constant refinancing. I mean, I refinance often in the low interest rate
market, but I'm a savvy mortgage banker so I can do that. But people were
losing a lot of fees, spending a lot of money. So that house that was a hundred
thousand [dollars], that got up to $150,000, you'd see them over the years,
spending forty thousand on just fees and refinances so that they never had
equity because even with the growth in equity, it got stripped away. . . .No
the biggest thing— so, we never got rid of mandatory arbitration, but the next
company I went to, we did get rid of it because it really was a bothersome
issue and it seemed silly that anyone would have that in their deals and their
requirements.
So, we got rid of credit life insurance and I do credit
Martin Eakes with Self-Help [Credit Union] and the Center for Responsible Lending.
I got quite educated from them, and it became my champion cause way back when
to get rid of [credit life insurance]. And we started with the banks and the
prime business. There was a lot of rural properties being charged credit life
insurance. And a little anecdote for you is … I could not get one company—and I
talked to CEOs of a lot of companies—to show me their pay history on how many
people used the credit life versus the huge, enormous fees they were financing
on top of their loan balances on credit life. My other memory of this is
Freddie Mac at the time, they didn't even know they had that on top of their
mortgages. So, it's a good example, when you’ve securitized something, you
think that principal balance is X, well, you might be surprised that
twenty-five thousand [dollars] of it is credit life insurance or whatever the
numbers were—I don't quite remember—and they were financed into the mortgage. So,
every month you're paying interest on credit life insurance. Well, I was
educated by CRL (Center for Responsible Lending) on that, and I was very
stunned over that, not knowing that that was already prevalent in a lot of
portfolio products. Then of course, in the subprime market it became an actively
used product as well.
When I left Freddie Mac, I was
recruited by Option One, an H&R Block subsidiary and I played the role of
working with industry advocates to bring them into the mainstream of prime
lending, believe it or not. And they were a big subprime lender, but they had a
lot of the culture things right. They weren't a showy one, believe it or not.
And they also, like I asked them my first month there, I said, “You have
mandatory arbitration, can you please eliminate that?” And they said, “Well,
you know what? We should eliminate that.” So, at the time their General Counsel
said, “No, no, no, we have that as protection,” but within a week they
eliminated it. And then we looked at all their adjustable-rate mortgages and
said, well, if you want a prepayment penalty, that's fine but if it's a
two-year adjustable rate mortgage, then make it a two-year prepayment penalty,
but don't go beyond that. Don't go to three years, don't go to five years. So,
they eliminated those. So, they were an interesting company who had pricing and
everything that was really close to prime, but those 2-28 [adjustable-rate]
loans were still always going to get refinanced. So that still doesn't take
away from this constant refinanc[ing], when a housing market reverses, you're
really stuck with no equity because there's nowhere to refinance.
But it was a good experience. And of
course, during that time, we started seeing signals of first payment defaults
and in a market that was happening at a more rapid pace. And so, I was
recruited to run the Hope Now Alliance, which is the crisis-era effort, because
I knew both the prime world quite well, but I was pretty knowledgeable about
subprime and what the differences were and what was happening in that market. So,
when I decided to do that, of course, it's the best thing I really ever did. I
felt like I've made a difference and tried to bring people together and do what
we're doing, like kind of talk through: “Okay, borrowers need help, don't
foreclose on them rapidly, I know there are all these different interests.” And
so, it was bringing together both Wall Street, investors, banks, and government
agencies to pull together, to get us through this crisis. We couldn't fix
everything overnight, right. And as we well remember, we spent many years
digging out of that, but it had long-lasting effects. But I do think we're in a
better place today and there's a lot better lending across the board and I'm
quite involved still with all of these things. . . .
Clare
Holtzman: . . . Could you talk
about what it was like to work as a woman in the mortgage industry [in the mid-nineties]?
Faith
Schwartz: Oh, sure. Gosh.
Well, so I grew up in the securitization kind of capital markets side in a
small company that grew, at a wonderful company called Dominion Bank Shares.
And that was in the eighties to the early nineties, and then had a great role,
a COO role for a small but growing company. And I've never been overly
challenged with not wanting to sit down with a bunch of men versus a bunch of
women. So that's probably a helpful part of my personality that I had brothers
and that wasn't it. But I must say that I, for a long, long time, including not
that long ago, I was often the only woman in the room. Certainly, trading
securities, certainly knowing a lot about those kinds of things. [T]here were
women in the business, but they were maybe loan officers or at HR or whatever.
So, I can't
tell you early on I had great role models, I had a few. But because the
industry is so interesting and there's just so much to do and learn about it,
and I'm still involved in housing as you can see. And it wasn't a big challenge
for me, I rather enjoyed it. I became kind of a leader at the MBA [Mortgage
Bankers Association], I chaired a lot of their committees. And I just was someone
who always looked outside of the organization I was with to get a little bit of
stimulation and education about the business. And I think if people do that,
they can really thrive in whatever they're doing instead of just kind of
thinking of your own company, your own profitability, how are your processes
going. But I was given a lot of opportunity almost everywhere I went. And so, I
have really pretty good stories and not everyone has those stories, but the
mortgage industry is a forgiving, in a kind of a flexible industry of collegiality,
if that makes some sense. So, people do tend to generally get along well and
try to work through things.
Clare
Holtzman: …[Y]ou talked a
little bit about this earlier as well, but can you talk a little bit more about
what led you to switch from the private sector to working with Freddie Mac?
Faith
Schwartz: Well, they had just
a great general reputation and they wanted me. I remember when they interviewed
me, they said, Listen, we want to look into these markets. We're going to run a
pilot. We have, you know, $50 million we can fund this project with. So you can
kind of hire some people, you can go work across Freddie Mac and you can pull
together kind of a skill set almost as if you have your lawyers, your quality
control groups, but they're all going to report up to their areas. But you can
kind of own the initiative and then bring everyone together. And so, we're
going to research, we're going to learn, we're going to transact and those
things. So that was very exciting to me. . . . I like managing the whole deal, I
like big picture.
I was
reminded in that interview and I said, well, "Are you thinking of buying
loan by loan from people?" They said, “Oh Faith, we're talking billions.”
And so way back then that was huge. Right? So, what attracted me about them,
and I reflect positively on my Freddie Mac days was, they're all so
professional there. There's a lot of noise about the GSEs. Let me tell you,
there are a lot of smart people that they might not have the same market
background I have of working in the industry and understanding mortgage company
issues, even bank issues, but they're very, very big macro thinkers about risk
and about how to assess things. And so, I learned so much by being part of
them. I think I'm the manager I am today and the thinker I am today because of
my years at Freddie Mac. I thought a lot bigger after spending time with them
and being around all these people at lower levels than me that had PhDs in
economics, you know what I'm saying? They just had reams of smart people. And
that makes for a really nice environment to work in.
Clare
Holtzman: …[G]oing into Option
One, how do you think that work impacted your perspective?
Faith Schwartz: You know, first of all, they were one of those clients—you
remember I said we had the whole market covered—so I mean, to be honest with
you, I had names covered that are less attractive than an Option One. Option
One had—and it was probably because it was part of H&R Block—but the
leadership and the management team didn't want to be predatory, they weren't
trying to, they weren't fast talkers, they weren't boiler room salespeople, . .
. they didn't even pay the way everyone else did. So, it wasn't a rah-rah
company. It was a very thoughtful company. So, I really loved that experience.
And I think I wouldn't have run Hope Now had I not had that experience because
I got to know the whole senior team, I reported into the top executives, I
asked a lot of questions, I tried to bring them into the Fannie-Freddie world
to just diversify their interests, because their loans were not really that
different than a prime loan, but they had maybe a blemish or two. So, I felt
that jump into prime would have been a good move for them, but it's
interesting. I couldn't get their interest in… they didn't have people [with] the
background that I had to really bring that fully around.
But I think it helped my
perspective. And really believe it or not, I liked H&R Block too. Again, they
were in a little bit of a different business but at the time Mark Ernst and Jeff
Yabuki, they're excellent leaders—they were always trying to do the right
thing. So, I mean, I was always in kind of a good role because mine was, “Hey,
we not only need to get rid of mandatory arbitration and trim down prepayment
penalties, every product we have has to be looked at for our margin, for our
adjustments, our teased interest rates.” And so, I kind of had fun with that
and people were so respectful of me. Honestly, we adopted all of those new
things when I left Freddie Mac. So, I was feeling pretty good about it, but
then, you know, 2007 came along. So, I would say, it was a good experience. I
think I learned a lot. I don't regret it. I think I helped them actually. And
they had some really good people, so no regrets. I think I knew enough to be
dangerous and I knew what to avoid, and I helped the market move forward
afterward. And so, I'm very proud of that of course.
Clare
Holtzman: I know you talked
about [how] with Freddie Mac, that there were . . . three policies that you
really focused in on. How did you select those three policies specifically?
Faith
Schwartz: Well, so this is
interesting and it's a very good question because if you look now, you might
say, well, those weren't the main issues, but back then they really were. And
the other one being mandatory arbitration which I had tried to get rid of
anyway in a different way. But so, Freddie Mac and Fannie Mae had been
criticized, believe it or not, over the years for trying to change markets,
because what they do is if they make a change, they can stop liquidity in
anything; “You're going to mandate credit reporting to all credit bureaus [or]
don't sell me a loan, you're not the kind of party I'll deal with.” That means
people will figure out how to report borrower's credit on every loan. That was
a fantastic example of doing the right thing. I liked Leland Brendsel and David
Glenn, and they were very much about doing the right thing. And of course, Freddie
went through a rough time, as did Fannie, but they worked hard to make sure we
were always doing the right thing and didn't want any blemishes on why we're
doing it. So, they would embrace all of these things. So, I was with a small
group of the top risk managers and we would say, we need to do X, Y, and Z.
They said, let's go do it. And I was appointed to be the head of that anti-predatory
lending taskforce by all of the executives. So, I felt probably very proud of
it. And, I think the teased ARM (adjustable rate mortgage), we picked that
because we said my Lord, if people are prepaying in two years or three years,
and they have a five-year prepayment penalty, nine times out of ten, they're
paying big fees that they never would have stayed in anyway.
So, we did
the low hanging fruit, obvious things. And I think we pushed to get rid of
mandatory arbitration in securitization, I don't think we got there, but when I
got to Option One, I got them to remove it. So, there are a handful of
companies that still do it, think of credit cards, they have some of that
mandatory arbitration and that's always been a controversial issue. As you
certainly look further, and you look at Dodd-Frank and what's happened post
2008, I would say asset-based lending is gone forever. Ability to pay, QM loan
(Qualified Mortgage loans)—it's here to stay. So, I do think there's much
better lending in place today, that a lot of protections are in place that were
not in place then. And I was on the Federal Reserve Board’s Consumer Advisory
Committee during some of this as well. So, it was a wild time to be there
because we were seeing negative—we didn't do this at Freddie Mac—but the
negative option ARMs, negative amortization. Those were also very predatory. That's
just my view. And I've never worked with them, but I just believe that product
was about as bad as it gets.
Clare
Holtzman: Can you talk a little
bit more about your work with the Federal Reserve?
Faith
Schwartz: Yeah, I was on the
Consumer Advisory Committee for them. And. . . a couple of years, it was with .
. .Chairman Bernanke was there and the Board Governors. And I think it was when
I ran Hope Now, it might've been Option One, but it overlapped when I ran Hope
Now. So, that was fantastic. So, . . . I was on the board with some consumer
advocates. I was of course trying to be a neutral broker helping with the
consumer advocates, but also the industry to do better. And I mean, I just
loved my time with the Federal Reserve Board because we took it seriously. I
think they did too. We were in a very dark time in the industry, so our
meetings were significant. We would have public hearings—I testified at some of
those hearings —and they got to the bottom of what predatory lending issues
were in the business. And we had a lot of testimonials, certainly from the
consumer advocate side on— I think mandatory arbitration was one of them that
was often [discussed] and neg AM ARMS (negative amortization ARMs), those kinds
of things. But the Board of Governors were all really good and Chairman Bernanke
as well. And it was a kind of serious time, but people really enjoyed being on
that committee. So, I think it was two years that I was on the committee, but I
really loved it.
Clare
Holtzman: …[A]s you got closer
to the housing bubble peak in 2006, what changes were you seeing in the
marketplace in terms of mortgage lending practices and the types of entities
that were making mortgages?
Faith Schwartz: Yeah. Well, what was happening—and all you have to do is
reverse engineer what happened after it—but what was happening is you were
seeing more and more securitization, including companies like Option One, New
Century, AmeriQuest, and Saxon, and all the kind of Morgan Stanley's group
doing more and more business. And, I would say, it was more of the Alt-A if
that makes sense, the no income no asset, which is not your traditional
subprime loan. Believe it or not, I think the traditional subprime loan was
more: “Well, that's a big down payment, 30%, and they can cash flow, they don't
report all their income because they have three jobs.” And it almost was, if
you think of the nineties—remember I said I studied that market—well, each loan
was kind of hard to figure out, but then when you saw the cashflow they had, it
was kind of: “Oh, well, they cashflow pretty well, they have an extra $3,000 a
month, every month and they have for 12 months or 24.” So at least there was
some thoughtful approach to it. But I think when you got into 2006, you had the
run-up in the business that was, all of the businesses were running-up, but the
prime market was losing share to kind of this easy securitization, easy money,
no income no asset, low verifications. And I would just say that wasn't really
just the subprime guys; that was like more of the bigger shops that were doing
it in the prime business, that even the GSEs were wrapping [credit guarantees
around] those Alt-A securitizations as well.
So, it became easy lending, easy
money, low rates, and global liquidity was coming into the market. They had
nowhere else to put their dollars. [A]nd then you had appraisals that were very
inflated, you know, the industry lived with hundreds of billions of dollars of
buybacks through Fannie and Freddie and some of the government agencies who
just went and did forensic reviews of the appraisers and the valuation, so as
that asset bubble started reversing—and some would say it peaked in 2006 and
started reversing in 2007 and ‘08 and ‘09 and ’10—you saw that 30% decline.
Well, the whole housing market couldn't sustain that. So, it locked up
everything. It was frothy. It was crazy. And loans were just being made right
and left and attention to detail was nothing like it is today, and nothing like
it was when I started out in the business, because you had very prescriptive
underwriting and there was easy money, easy access to people owning more than
one house. I wish I could tell you I thought that [The Big Short] and some of those shows were exaggerated. I don't
think they all were. I think there's some real truth in some of those shows and
you know it was obviously a scary precursor to what went on.
Clare
Holtzman: And can you talk a
little bit about what your transition was like from working on the mortgage
lending/servicing side to working at Hope Now?
Faith
Schwartz: Yeah, so didn't work
on servicing at Option One I ran their public affairs. And I kind of did some
other operational enterprise risk things for them. So, Hope Now was quite a
personal professional challenge, I had to learn early on not to take things too
personally, because everyone was mad at everyone. So, you had the banks and the
mortgage companies—well, the banks were not thrilled with the mortgage
companies, but banks and mortgage companies were both in trouble because
there was usually a subsidiary somewhere that did a lot of subprime or Alt-A
business. You had the regulators just up in arms, the Fed, OCC [Office of the
Comptroller of the Currency], the FDIC [Federal Deposit Insurance Corporation],
and then you had— it started with the Bush administration, Hank Paulson, Ben
Bernanke, I worked quite closely with all of the administration during the
first two years, year and a half, of 2007 through 2008. And we had a lot of
intense meetings with CEOs flying in sometimes once a week, from all over, just
to meet on what are we going to do, this is what we have to commit to, those
kinds of things. And we'd have a lot of insights from Treasury, HUD (U.S.
Department of Housing and Urban Development), and the Fed was quite involved
too.
So, I would just say it was a real
kind of firehose learning experience. I really did try to tap being a good
leader without overreacting to anything. And I tried to testify for both the
Republicans and the Democrats, I was asked by both a lot and I did. And, then I
would kind of be tough on all parties and say: “We aren't doing enough, we
don't have enough 1-800 numbers, let's do this and why are you doing this?” “Well,
let's just say we're not going to do this.” And then we started up a portal, I
started a nonprofit because I didn't want anyone to own it. And it was to just
deliver the documents because at this time…, some of the banks, some of my good
friends who worked there just said, “Faith our mail room has FedEx boxes to the
ceiling in two rooms,” and they couldn't get to all the information, couldn't
hire fast enough. And remember, there's no money coming in when people are
defaulting. So, you also have skyrocketing costs, you have people going out of
business that were the non-banks, not all of them. You had BofA [Bank of
America] buy Countrywide who really had to power through all of those difficult
years and just get saddled with a whole bunch of stuff.
So, it was a pretty tense time, but I will say I was
really proud to be doing it. I really felt exhilarated. We worked 24 hours a
day. I'm telling you it was just amazing effort and everyone chipped in. And so,
I had very high-level people, whether it was from WaMu, from Chase, whatever,
running committees for me. So, I used the resources of everyone else, but
actually invited in the advocates. [I]t was always quite open, I tried to be
transparent, we would issue standards, those kinds of things. And the public
was mad. The public was mad, and they were mad at the banks. They didn't trust
anyone. So, we just had to dig out and it's great to talk about, but honestly
you had to act it out. So, we built reporting. Good or bad, we reported every
month, everything that went on.
And that was a really smart thing
to do because over time you could really start seeing a curve of support and
foreclosures going down, more than the people that were being helped. And I
think we had to do that, that had to be a public report. And so, I was proud of
that. We pulled that together with a lot of smart people who helped us get the
data, Black Knight, some others who really stepped up and helped support us
with all that servicing data. So, I was quite proud of it, I still really am, and
it has changed who I am today because even every job, anything I do— I'm on
boards now, I do some other things—I'm always about “just start with a
consumer, try to do it right, and if you can figure out that way to do it right,
you know your own answer, some kind of issue that might come up.” And I just
think corporate America had gotten away from that. I think they still could use
a little bit of nudge on that. But I think you do the right thing usually when
you kind of always keep [the consumer] in the center of your thing, it's your
client, it's your customer. Right? [B]ut it was pretty transformational, I'd
say for me
Clare
Holtzman: Going back a little
bit, you said you started a nonprofit just to clarify, do you mean with Hope Now?
Or is it a separate nonprofit?
Faith Schwartz: No. So, during Hope Now I started something called Hope
Loan Port, which was a tech based—this
is just kind of funny, it was to build a website—we already had someone who had
built it—to say, “I'll take your income docs, your tax return, let's say your
pay stub, maybe it's, what else?” But that was probably it. And whatever else
you owed to show your servicer what you were up to. Because remember they
couldn't talk to each other, they wouldn't talk to each other. People weren't
even communicating. We mailed millions of letters to customers across the
country to just reach their loan servicers. So, I was tired of testifying to
Congress to say, “But they didn't get that package from the borrower. They
didn't get their latest pay stub or their credit report that shows they were within
the ninety days— like they got lost.”
Now, truth is, they probably did
get lost in a fax machine or in— remember it's all paper, and those FedEx boxes
I told you about, well, if they're not opened in a timely way you can't get
that loan modification, you're about to go to a sheriff sale. So, communication
was a big deal. Technology was not that existent in servicing. So, we started a
web portal and it's called Hope Loan Port—and they just transitioned and ended
it—but I was on their board for several years, chairman at the end. And I asked
Chase to loan us a project manager, and we didn't have resources, right? So, we
had the technology donated by the tech provider, IndiSoft, and then I had to
get the banks and servicers to say they would check every day for information
on that website, so we kept the data safe so they could pull it.
That was a heavy lift, whenever I
would just say, “Well, what is it you are worried about?” “This is what you
want, you want information from your borrower.” And by the way, they're going
to do it through a loan counselor so that nonprofits can help them get it
together. They can get their budgets together, they can get whatever. So, it
felt a little clunky, some people actually integrated well with it. Others just
checked the data. And so that was something that kept going on for years. And
it was just another way to communicate with borrowers who had said, I can't get
through to them, their 1-800 numbers take me 10 minutes. Those kinds of things.
So that's why I did start that. And I was going to pay for it myself, but we
ended up finding a way to get it funded. Because it was not about a big,
expensive thing. It was about getting the documents to the servicers.
Clare
Holtzman: And so, Hope Now
brought together lenders and servicers. What were the incentives to bring loan
servicers to the table?
Faith Schwartz: Well, I will just tell you if you
read the history book, you'll remember who Hank Paulson was. And he was a big
giant man who would lean forward and say, get these lenders and servicers on
board and to the trade association, Financial Services Roundtable, and the
Housing Policy Council, which is where I kind of was career recruited into
before. And so, I virtually called every one of their CEOs and said, “Listen,
we're forming this thing that—the country's in crisis da da da.” I'd say over
half, right away, were fine doing it. But we had others like Wall Street that
[said], “Yah I don't think we need to be part of that, that's really just for
subprime guys.” Well, of course they'd have a subsidiary or something. So, we
did have the nudge from Treasury to make the call if we weren't making
progress.
So, I will
just say that everyone was at the table. And it was helpful because all of a
sudden, it turned into a pretty well-oiled machine. We started running and
said, we need your data every month, we need to collect and report and we'll do
it in aggregate. And instead of saying, “We're not going to share our data with
you,”… we almost skipped over those protocols. I also would have them fund outreach
events across the country. We started, we did hundreds of them and we went to
where the borrowers lived in those communities. And I mean, if you ever felt
like that was a tough time, just reflecting on it, I remember going up to the
FedEx Field up in Massachusetts, Barney Frank was there, all the legislators [were]
there, the Attorney General from Connecticut came over and there were about 2,000
families in line, quietly standing outside that stadium to march in and just
talk to their loan servicer, talk to the lawyer's committee if they had a claim
against their servicer. So, we would invite the lawyer's committee, we'd invite
NeighborWorks America, we'd invite all the counselors, and then the loan
services were in a different room. And so, they could kind of spend time with
the nonprofits and advocates and then together go in or just go on their own.
And people would have boxes of information. It was quite something. And it was
very, I mean, it's one of those things. Does it move the dial? I don't know. It
might've, maybe 200 people got helped out of those 2,000. I don't know that—we
used to track that—but I would just say it was meaningful because they had
never even talked to their loan servicers. So, it was very, I mean, those were
the kinds of things that I take with me on what did we do. We did a lot.
Clare
Holtzman: And so how did you
connect with nonprofits and other organizations?
Faith
Schwartz: Well, I had spent a
lot of my career already being connected to them and that helps a lot. I don't
think it's easy to go sit with the civil rights groups unless you know them
pretty well. My Freddie Mac experience had me really getting to know that
world. And, because when I ran that pilot, we learned, remember I said from
Martin Eakes and others. So, I became quite entrenched in the civil rights
groups while I was at Freddie Mac in the nineties. Not that long ago, I was on
the board of the National Fair Housing Alliance, one of the premier civil
rights groups out there, they're fantastic and protect the rights of those who
have been discriminated against. It's a slightly different issue than what
we're talking about, but I'm fortunate I've had good relationships. And I'm on
meetings twice a week with most of the advocates in the country that are
represented in Washington. So, I stay quite connected to them.
Clare
Holtzman: Were there any
challenges in creating relationships between nonprofits and the servicers?
Faith
Schwartz: Oh, sure. I mean,
that's ongoing. I think the challenge there is— and people still don't quite
understand that—but servicers follow the rules that investors set for the
contracts they service first, they outsource. So even in this latest crisis,
which I'm involved with, Fannie Mae and Freddie Mac set the rules on how the borrower
has to repay the debt that they're forgiven, right? Not forgiven, it's
deferred. And so, you can be upset with a loan servicer all day long. And this
has never been easy to understand, but their job is to service on behalf… they're
an agent of Fannie Mae and Freddie Mac, they outsource their work. If those
agencies—so I'm tough sometimes on them—if those agencies don't give enough
direction and a borrower is in limbo over something, it's their job to tell
that servicer, or the servicer really can and should do what they think is in
the best interest of that borrower.
But then
that gets into all kinds of penalties and interests, so then you get in trouble
when you do things that are not prescriptive. I think that was hard, and I
understand it because people would probably say, “Well, that's crazy, these
guys have to forgive the debt, they have to do this and that.” So they're not
the ones who have the balance sheet, they're not the ones who have the
capability to do all of that. However, I've got to tell you, I'm quite
impressed with where we've come to, because servicers are giving enough
latitude that they've been quite nimble, even in this crisis of being more on
top of those issues and making sure their scripts are right and pushing the
agencies to get back to them on what they're going to tell their consumers,
because at the end of the day, it's the risk that Fannie and Freddie take, it's
the credit investor that owns that risk, not the loan servicer. They service on
behalf of them and they get paid a fee to do it. So, it's a very different
concept. If you're a bank and you're servicing it and you own it in portfolio,
you own all that risk, that's different and you can kind of set up the best
practice that you think you can, or you can point to the GSEs. So that's the
difference, kind of.
Clare
Holtzman: [W]hat strategies
then did you utilize to foster collaboration between these different groups
when you were working at Hope Now?
Faith
Schwartz: Well, you know, I
used a lot of moral authority of just “let's do the right thing and keep
powering through and not do this all the time.” And I'm not perfect, I'm sure I
didn't always do as well as I could have, but I felt pretty good about it. I'd
be on calls sometimes for two hours just listening to the back and forth, you
know. Or the other thing is trying to be proactive to come up with practices people
could agree to, and in the early days we put out servicing practices, guidance,
that kind of said, we're going to do this. And that was kind of unheard of, because
it was like, if you have escrows, we're going to do this, if you don't, we're
going to do this—it was almost like a 101 on, what do you do in loan servicing
that no one understands what you do. What
are your SLAs [Service Level Agreements] to say, we worked to keep our
abandonment rate below one minute, all those kinds of things.
So, we worked together to get
those put out in the airwaves and we'd have press announcements with Fannie and
Freddie on breakthrough things that we did. And Fannie and Freddie were great,
they worked with me and Hope Now— Freddie Mac actually got a grant and ended up
funding Hope Now, I’m not sure people know that, they ended up getting some
kind of grant that they in turn gave to Hope Now and some other nonprofits. And
what was helpful about that is, they helped us kind of stay in business and not
really have to worry about the operational overhead of myself and some of the
others for a couple of years. So, I would just say it was such a dark time, but
people generally were leaning toward a lot of goodwill. Even the advocates, there
were definitely some that probably always didn't like it, but I think Hope Now
truly was a coming together of disparate groups of people who had different
interests. Wall Street had different interests, maximize profits. Well Fannie
and Freddie, they're kind of a quasi-government agency, it's not all about
profits. HUD, that's an explicit government agency, that's not all about
profits, that's mission driven. So, the Federal Reserve Banks, they wanted
their banks to have liquidity, it goes on and on. There were a lot of different
interests. The advocates wanted the consumer always to keep their home. And we
had to find a graceful way for them to exit it if they had to exit the home.
Clare
Holtzman: [Y]ou're talking
about putting together these guidelines, were these made as a collaboration?
Faith
Schwartz: Yes.
Clare
Holtzman: And were there . . .
any that were harder to negotiate than others?
Faith
Schwartz: Well I mean, I think
part of this is the technology wasn't nimble. So, you can say you're going to
do things, but if you don't have a—and it starts at 1-800 numbers, no one even
had that, so, I made everyone agree to have an 800 number for people to call.
They didn't have it, most did not. That’s how long ago that was. So, I don't, thinking
through it was really, it's the technical jargon of what it is and what it
isn't and what you could do. [W]e had a lot of lawyers on the calls. We had
some of the experts, Vicki Vidal from the MBA was good, helping us kind of with
the technical language. And, anyway, I was proud of the document.
Then the next chapter of Hope Now
was when the Obama administration came in, there was some realization that this
was bigger than just industry working its way through the issues. And so, they
said, we're going to need some government incentives, because we were just
announcing things, we'd come to terms with Wall Street and Fannie and Freddie
and curbed the modifications to bring down the rates and things like that. But
what the next administration did with Tim Geithner and Obama—we still had Ben
Bernanke at the Fed, which was helpful by the way because he was a pretty
strong steward through a lot of this—was they decided to give an incentive for
the HAMP [Home Affordable Modification Program] mods [modifications] where they
would pay the servicers extra money to do it. And then the push towards the
HARP [Home Affordable Refinance Program] refinances, which I would just tell
you was the best execution of how to give stimulus to people who had a higher
loan to value. They were trapped into kind of high value houses, but if you
could bring it [the interest rate] down to 3%, from 5% or 7% or 4% and save
them hundreds of dollars a month, you weren't forgiving the debt, you were
virtually just bringing their financing down. That was a big, big deal, just a
big deal. So, hundreds of billions of dollars got done that way. And I think
that was a helpful stimulus for a very bad time.
So, the government engagement—Hope
Now was still very instrumental, it was helpful making homes affordable, we
were always at the table—but that was a transition because that wasn't where
the first administration was. And it caused some disruption, we slowed down on
all the modifications for up to nine months in this to put everyone in trial
mods. And without getting into too much detail, that just held up everything
and maybe it stopped foreclosures, but the paperwork wasn't there, you had to
get all the paperwork and people weren't paying on their mortgages on some of
this. So, it was becoming kind of a—or they're paying a much-reduced rate, but
they didn't know if they qualified because they had no documentation on it. So,
it was messy, but you know, we powered through it. And of course over the
number of years, I was there five years, at the end it was really back down to kind
of a small but persistent group of troubled homes and delinquencies and
consumers, but we'd gotten through the worst of it and I was kind of feeling
like I needed to look for the new adventure. So, I decided to step down from
that. So that was [the] end of my career there at that. But I'm still pretty
involved in all of those types of things even today given the latest crisis.
Clare
Holtzman: … Over the last
decade, we've seen a number of different narratives emerge to explain the
financial crisis. How do you understand what caused the crisis?
Faith Schwartz: Well, I'm sure you've heard this cliché, it was a perfect storm.
I think easy money, easy global money into the U.S. financial system was part
of it. I think we did not have the protections we now know needed to be in
place in that situation—you know, we had HOEPA loans, but they're very, very
high price, we didn't have product protection. And I'm not sure my industry
colleagues would agree with me, but the CFPB (Consumer Financial Protection
Bureau) is probably one of the best things that happened when it comes to just
having more structure in the market around consumer protection. So, I'm a big
believer that that's been a good thing for the market in Dodd-Frank. We clearly
needed it, without question. So, I would say it certainly—you don't blame the
consumers because everyone made it easy for them to get the loans.
I think the
complexities of the derivative market, like who really owns the risk—and I love
securitization, but securitization got something that I should be able to tell
you exactly what happened in it, and even I, who grew up in securitization with
an MBA, and spent my first half of my career trading securities and being over
that risk, still couldn't today tell you about the repackaging, and splicing
and dicing of the risk issues. So, risk got kind of disintermediated, you had
no skin in the game all the way through. And we had this overvalued—I think
valuations are a big part of this, appraisals, I still think appraisals are a
problem, still think they need to be—they’re subjective. We need to have much
more objective analysis on appraisals, not they all match every sales contract
you ever got.
So that's a
part of the problem that still exists. And what else? I think we have more
capital in the system. We did not, it was very leveraged, and I just think one
and done, when you make a loan and it's gone and you don't have to ever
remember you made that loan, that [there] was a lot of that going on. So,
consumers, sure they had an appetite, they're optimistic, they want to do five
things or think they're immortal. You know, there's a little bit of that
consumer buy-in and certainly some of the consumers propelled it as well, but
you just can't blame the victims who also got, I mean it’s just too easy, I
think. I'm not a big believer that it was because people wanted the American dream,
and this is the only way to get to homeownership. I don't buy into that. I
think home ownership is a wealth building opportunity and we need to find ways
to get more people into home ownership. So, I don't buy that that drove
everything. I think it was about money, follow the money and that's all.
Clare
Holtzman: And to what extent do
you see your personal experience as adding something important to our
understanding of what happened in the run up to 2007 and ‘08?
Faith
Schwartz: Well . . .I have a
pretty good knowledge of all the players. And . . .I will say in all the roles
I've had, I've always tried to be the one on the right side of the
conversation. I certainly learned that I wasn't always right. I didn't know
that things weren't performing quite as well as I thought they were, and it's
because they were refinancing out of problems and the home price appreciation
came up. And I'd say that one was. . . I should have gotten savvier about that
earlier. I will say I was one of the few to call the alarm early in the
mortgage business because I was meeting with these CEOs of the Housing Policy Council.
And that's why they asked me to run Hope Now, because . . . of Option One and
seeing some of the early payment defaults and not understanding what was going
on. So, I think having standards is a good thing. And so, I hope some of my
history is always promoting a better market. I work right now, I'm spending a
lot of time in the modernization issues of the market, trying to take out the
high cost of origination, the thousands of dollars borrowers ended up paying
just to get a loan. It's silly. So, there's good work still to be done.
Clare
Holtzman: Looking back on the
crisis over a decade later, what do you see as its most important lessons for
mortgage lenders, brokers and state level policy makers?
Faith
Schwartz: Well, I'm not a huge
believer that we need a different role on the states on all the different issues.
I think not degrading our product protection, such as, not making asset-based
loans, that's an excellent one, you have to document income, that's an
excellent one. You have kind of the judgment, that's regulated now, so it's
impossible, it's illegal to make a loan that isn't right. So that's huge. Keeping
those protections in place is going to be very important to the health of the
market. I do think we have to innovate a little more and embrace ways to make
an easier loan than we have today. I think it's still pretty clunky and
difficult. . . .
If we can find a way for the
incentives to continue to incent[ivize] people to make good loans that perform—and
it doesn't mean make a perfect loan because then you don't take any risk and
you don't get people in who are good paying credits, but might have some
blemish. I've always been like, “Well, who are we missing? Where's that 6
million borrowers that just disappeared from the market. I know they pay their
bills. They might sometimes miss something, but they could be [paying] instead
of $2,000 a month … rent, they could be paying $1,500 for a mortgage.” So, I
think we have to find ways to continue looking for getting people into home
ownership who want it and who are committed, have the capacity and character to
do such things. So, I am not a buyer, I don't buy the lack of homeownership—only
if people don't want the responsibility, that's one thing, but the wealth in
our country is usually through homeownership and we see a lot of economic
disparity today over that issue. So, I'm a big believer in homeownership.
That's why I work on it.
Clare
Holtzman: And then is there
anything that you think I should have asked or that you would like to add?
Faith
Schwartz: No, I think you hit,
you did a good job. I think now, I don't see a lot of quote “predatory lending.”
I'm really more worried about too much perfect lending and not enough diversity
and disparity. When I see average FICO scores last month of 760, I'm bothered
by that a little. One, I mean, I don't even think my own score is always that. But
I guess my point is we have to be making loans for people to get into homes. We
have to be building homes. We have to be looking at shelter for people and first-time
home buyers in a smarter way. States need to be helping on the regulatory side
on that. So, we keep our zoning reasonable. And that's all I have. I think you
hit all the good things. I'm not seeing, you know, terrible practices today
that I see. I know there's probably some going on, there usually are, but
anyways, so that’s that.
[END OF SESSION]