During prolonged upheaval in how the government regulates Fannie Mae and Freddie Mac, a constant at the Federal Housing Finance Agency for more than a decade was its top lawyer.
Alfred Pollard, who has been at the forefront of housing finance issues for 20 years, retired in April as the FHFA’s general counsel. He had held the the job since 2008, when the agency was established, and was previously the top lawyer at its predecessor agency, the Office of Federal Housing Enterprise Oversight.
Pollard discussed having a front-row seat to some of the pivotal financial events of the past 20 years: the accounting scandals that wracked Fannie and Freddie in 2003, the financial crisis of 2008 and the conservatorship of the government-sponsored enterprises just six weeks after Congress created the FHFA from the remains of OFHEO, to name just a few.
Those turbulent years were “like a balloon that kept being inflated,” he said in an interview with American Banker.
“The key for me is that FHFA should be a core player in any decisions on administering an end or a transition from the conservatorships,” said Alfred Pollard, who retired in April as general counsel of the FHFA.
And he left the agency with housing finance oversight still in a state of uncertainty. Nearly 13 years after Fannie and Freddie were placed under government control, they remain the wards of Uncle Sam.
More than a decade after policymakers appeared to reach a consensus that the GSEs needed to be overhauled, there is still little if any agreement between the parties about how to do that.
Meanwhile, the Supreme Court is poised to rule any day on whether the president has the authority to fire FHFA Director Mark Calabria, and whether shareholders of the GSEs have a claim on profits that have been swept into the Treasury.
“There are all kinds of possible outcomes to the case,” said Pollard, who was a behind-the-scenes player leading the FHFA team litigating the case. “As to the impact on FHFA or the regulated entities, it remains uncertain.”
Pollard, who spent eight years as a bank lobbyist before being hired in 2001 as OFHEO’s general counsel, wins high marks from former colleagues for having navigated so many changes at both agencies. During his tenure at OFHEO and then the FHFA, he served under a total of seven different directors.
“To be general counsel for that long through that many different directors and so many momentous events, it’s really quite remarkable,” said former acting FHFA Director Ed DeMarco, who led the agency from 2009 to 2014 and is president of the Housing Policy Council. “Alfred was there to serve the agency and the director, whoever the director was. We brought our own style and philosophy and yet he successfully served each of us and I think that’s because he was successfully serving the law.”
The following is from a conversation with Pollard that has been edited for length and clarity.
How do you predict the Supreme Court rule could rule in Collins v. Yellen?
ALFRED POLLARD: This is a complex case in the form it came to the [Supreme] Court from the 5th Circuit. The case focused on two main issues. First was whether the statutory provision setting removal of an FHFA director for cause, as opposed to at the will of the president, was constitutional and, if it was not constitutional, what did that mean for actions taken by the agency. And second, should the plaintiffs have a right to vacate the third amendment to the [preferred stock purchase agreements, or PSPAs] under a variety of legal theories they had raised and should that issue return to the lower courts for further consideration.
The hearing on the case produced a wide range of questions from the justices and it reflected the complexity of the positions taken by the government and by the appealing plaintiffs. It appeared every issue raised intense interest and the justices pressed hard on the solicitor general, the plaintiffs and the amicus arguing in favor of the constitutionality of the “for cause” removal provision. The hearing appeared to last as long as the hearing for the Affordable Care Act case and that reflected, I think, the complexity confronting the court and the significance of the constitutional issues.
There are all kinds of possible outcomes to the case. As to impact on FHFA or the regulated entities, it remains uncertain. There are several other court cases beyond Collins and they have considered the same issues and are awaiting the court decision as well. So there will be a decision and many possible outcomes and potential impacts, but for now my best comment is, we’ll see.
What is your prediction on when Fannie and Freddie will exit conservatorship?
My standard line is that the last thing I predicted was President Jimmy Carter getting reelected in 1980. Everybody is speculating right now. Exiting conservatorship has a lot of moving parts involving FHFA, the Treasury, the legal structures of conservatorship and you have the PSPAs and whatever role Congress might wish to undertake as well as what changes might be made if any to the business models of the [GSEs]. The key for me is that FHFA should be a core player in any decisions on administering an end or a transition from the conservatorships. FHFA has a knowledgeable, experienced and very diverse supervisory and legal staffs and that infrastructure needs to be tapped whatever choices are discussed.
Should Fannie and Freddie be privatized?
When you say privatized, they’re private companies now, but they’re in conservatorships. They have preferred and common shareholders that are holding shares that don’t get dividends or get to vote.
It has been a turbulent 20 years first at OFHEO and then the FHFA, punctuated by the 2008 housing crisis. What will you remember the most?
I can speak as to the legal department. When we hit 2008, we had a national crisis and a lot of issues presented to the legal department which included standing up a new agency at the same time we had to support planning and imposition of the conservatorships. There were plenty of 20-hour days, not just at FHFA, but at Treasury and the Federal Reserve. It was a hectic time because as soon as the conservatorships were in place, the next week the Lehman Brothers bankruptcy occurred and that set the country into the heart of a systemic event. Once the conservatorships were in place, the immediate focus was on trying to keep homeowners in their homes.
With support from the agency directors over the years, the legal department sought to assure it could respond to ever-increasing demands for robust advice for the agency and regulated entities. The complexity facing the lawyers always appeared to increase. For example, we filed 18 lawsuits in 2011 against the biggest banks, where FHFA recovered $25 billion on private-label securitizations over a seven year period. This included not only work by our lawyers but as well oversight by them of the work of outside counsel.
You dealt a lot with homeowners trying to avoid foreclosure during the financial crisis. What lessons from that experience can be applied to forebearance issues arising from the COVID-19 pandemic?
I remember flying to Boston during the financial crisis when acting Director DeMarco had indicated he did not want to do undertake principal forgiveness. FHFA had deployed numerous other refinancing mechanisms. I went to a union hall and I walked in the room that was supposed to have three people [there] and found 95 folks yelling and objecting as soon as I sat down. But it was a worthwhile meeting as after a time individuals came forward with specific complaints and items where assistance from FHFA was occurring. I think we made progress.
During that crisis, I had phone calls with death threats. We had individuals calling time and again to the agency and screaming at the secretaries, something I would not tolerate. I had those calls sent to me and I warned them against such actions and then went on to learn what their particular situation was and sought to find out if anything could be done. What clearly came through, if there had been any doubt, was the premium everyone has on owning a home.
FHFA experience with directing the enterprises to undertake programs for financial displacements such as in 2008 or natural disasters had come together into a “tool kit” that put FHFA and the firms in a very good position for dealing with the current COVID-19 pandemic. While additional steps were added, the foundation was there. Director Calabria has been a leader in addressing pandemic-related issues for homeownership and for multifamily housing and in working with other government agencies.
What is the greatest risk in the housing market?
I believe that more can be done to inform consumers of what they are undertaking with a home purchase and a mortgage. We have legal protections in place for homeowners, but financial education varies across the country. In the 2008 financial crisis many purchased homes they could not afford. Going into the crisis, the market led home purchasers to the idea of a home as a get-rich-quick investment rather than the traditional view of a home as shelter with a gradual accumulation of value. The dollar amounts involved with mortgages and home purchases are significant and the need to understand what the commitment being undertaken means for the individual or family is critical.
I think consumers need to be armed with the right questions. There are questions that everyone should ask. So beyond the many disclosures consumers receive for a home purchase, they should be able to ask questions of what costs will be beyond the mortgage.
What is your view of electronic notarizations and efforts to eliminate paper in the mortgage industry?
I think paper is good. But a paper-based system can see some improvements while providing certainty for lenders, homeowners, local governments and even judges if we have a tested and secure electronic mortgage environment. The need for it was evidenced by Hurricane Katrina and the flooding of the courthouse basement where folks could not access their ownership documents to secure emergency funding.
My concern is that we are moving activity by activity, looking at each element of the system individually. It would be better to have a look down at the entire process and related documentation. Service providers have produced mechanisms for electronic signatures, computer-based appraisals and remote notarization and these are adopted in many localities. E-mortgages exist in small numbers. But, the work has not been completed and is not comprehensive.
The negative right now is all this hacking and data breaches that continue to occur, which raise questions and challenges. Bankers have a very good record addressing moving all of this paper to reduce the cost over time and to provide secure systems. I think the various steps taken so far are good, but a full perspective from the pre-mortgage documents to the sale of a home and the intervening steps would be a better approach now.