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Former Freddie Mac CEO Plans to Keep Hand in Housing Finance

Donald Layton reflects on his new ‘technocrat’ role and on what it would take to end conservatorship of two mortgage giants


Donald Layton, pictured in his summer house in Westchester County, N.Y., ran Freddie Mac for seven years while commuting most weeks between the company headquarters in Virginia and his home in New York City. PHOTO: BENJAMIN NORMAN FOR THE WALL

By Andrew Ackerman - July 12, 2019 8:00 am ET

https://www.wsj.com/articles/former-freddie-mac-ceo-plans-to-keep-hand-in-housing-finance-11562932800?tesla=y

Freddie Mac faced an uncertain future and heavy turnover when Donald Layton joined the mortgage-finance company seven years ago as its chief executive.

Mr. Layton stepped down at the end of June. While Freddie and its larger cousin, Fannie Mae , still operate under federal control through a legal process known as conservatorship, their fortunes have rebounded along with the recovered U.S. housing sector.

DONALD LAYTON… AT A GLANCE

Age: 69 Education: B.S. and M.S. in economics from Massachusetts Institute of Technology, M.B.A. from Harvard Business School

First job: As a teenager, he delivered newspapers on his bicycle for his hometown paper in Great Neck, N.Y.

Fun fact: Mr. Layton is retiring from full-time work for the third time, after previously stepping down from top jobs at JPMorgan and E*Trade
The Trump administration is crafting a plan to return these government-sponsored enterprises, or GSEs, to private-shareholder ownership, a process that is likely to involve recapitalizing the companies and allowing them to retain earnings that currently go to Treasury under the terms of their federal bailout. The plan, drafted by Treasury, is expected soon.

Seized by the government during the financial crisis for taking on too much risk without a sufficient financial cushion for possible losses, Freddie and Fannie are expected to remain at the center of America’s $10 trillion home-loan market, where they help ensure availability of the popular 30-year, fixed-rate mortgage.

Before joining Freddie, Mr. Layton had a 30-year career at JPMorgan Chase & Co., where he held a series of jobs, including as head of the retail bank and co-head of the investment bank. He retired from JPMorgan in 2004, left retirement in 2008 to become CEO of online brokerage E*Trade Financial Corp. , before stepping down the following year. He joined Freddie in 2012, and ran it while commuting most weeks between the company headquarters in northern Virginia and his home in New York City.

The Wall Street Journal spoke with Mr. Layton by phone from his summer house in Westchester County, N.Y. The interview has been edited and condensed for readability.


Retired Freddie Mac Chief Executive Donald Layton, pictured in front of his summer house in Westchester County, N.Y., says administrative reform is the first step toward overhauling housing finance.

WSJ: What’s next for you? I saw that you just joined the Joint Center for Housing Studies at Harvard University as an industry fellow.

Mr. Layton: I am retired from full-time work, but I will devote a considerable amount of my time this year and maybe even the next few years to educating policy makers about the facts and figures and the realities of housing finance so they can do a better job doing their jobs. It’s a complicated topic, so it’s hard to understand if you’re not a specialist.

I’m going to be the technocrat, and I’m not doing this because I have any special-interest money at risk or writing for any big ideology reasons.

WSJ: To privatize themselves, Fannie and Freddie will likely have to raise tens of billions, possibly through a new initial public offering in the coming years, combined with any earnings they are allowed to retain. Is raising capital the hardest part of ending conservatorship?

Mr. Layton: No, I would not agree with that. There’s a low-risk approach, which is imminently implementable and which I call the baseline: The companies have four or five years of retained earnings, during which all of the preparatory work is done by the companies and their federal regulator. Then there’s a re-IPO to get over the finish line, so that on the closing of the IPO, the conservatorship ends and investors get their voting rights.

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Raising the capital through the baseline is not hard. It’s low-risk. It’s all the plans to accelerate that process that are complicated.

If Freddie Mac needs $50 billion and the company is earning an average of $7 billion a year, and it takes four or five years to get everything ready, that would mean well more than half of the capital could be raised through retained earnings. So all of a sudden, the re-IPO is less than half the size. And the company has developed a nice track record of showing what you can earn and all that good stuff.

WSJ: But you’re still talking about raising tens of billions of dollars while the administration is considering steps to shrink the government’s footprint in housing, which presumably makes Fannie and Freddie less profitable?

Mr. Layton: When the Treasury plan comes out, we’ll know more about shrinking the footprint and such. Right now, that’s just supposition.

WSJ: So you’re saying the numbers are unprecedented but it isn’t impossible?

Mr. Layton: No, it isn’t impossible. Four or five years of retained earnings, then do an IPO of more-likely digestible size that would be contemporaneous with the conservatorship ending and with the shareholders getting their full rights.

That’s the baseline. I know a lot of people who would love to accelerate from that, but then they have to deal with all of these trade-offs. That acceleration is one area that’s hard.

The second part that’s hard is the corporate-finance legalities and the politics of dealing with the original investors. How are they going to treat the original common stock investors? How are they going to treat the junior preferred investors?

WSJ: What do you plan to write about?

Mr. Layton: One topic is rent-seeking. Housing finance has lots of classic rent-seeking that not unexpectedly comes along when the government has such a large role in the credit of mortgages. The biggest rent-seekers in their day were Freddie Mac and Fannie Mae. There was an attempt around 2005 between the George W. Bush administration and the Federal Reserve to get legislation passed in Congress limiting the size of the subsidized GSE investment portfolio and it failed, it did not get passed. The lobbying by the GSEs was very successful. So that’s an example of rent-seeking.

WSJ: If the Treasury Department comes to you and says, “How do we overhaul housing finance and end the conservatorship,” what’s your advice?

Mr. Layton: First thing would be let’s focus on administrative reform, because I agree with the conventional wisdom that legislation is just not likely to be in the offing.

WSJ: Some of the existing Fannie and Freddie shareholders with longstanding ties to senior administration officials are betting on a “recap and release” plan that could restore Fannie and Freddie to the way they existed before the financial crisis. Are you worried these shareholders are effectively driving the bus on what the administration does in this space?

Mr. Layton: I have no evidence they’re doing that. I do have evidence from public statements that “recap and release”—going back to the old model—is not what the administration means. They mean “reform and release,” and I think they’ve been very public about that.

WSJ: What does that look like?

Mr. Layton: Going forward, the GSE business model requires Treasury support in some form. The market will not accept, in my personal view, the prior wink-and-nod implicit guarantee of the companies. Without legislation, you can’t get a full-faith-and-credit guarantee. Fannie and Freddie need some form of credit support from the government that is acceptable to the market. It’s necessary for their business model.

But it can’t work the way it did before the financial crisis. I think in the end, they’ll end up with the backing of the federal government, but it will come with more strings attached than under the existing support agreement. There would then be limits on their business that they did not have before conservatorship.

Write to Andrew Ackerman at [e-mail]