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April 22, 2020

Vulnerabilities of the Mortgage System

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Edward Golding
Edward Golding | Executive Director MIT Golub Center for Finance, MIT Sloan School of Management
Laurie Goodman
Laurie Goodman | Vice President Housing Finance Policy, Urban Institute
Ted Tozer
Ted Tozer | Senior Fellow Housing Finance Program, Center for Financial Markets, Milken Institute

Richard Green moderates a panel discussing vulnerabilities of funding and processes in today’s mortgage system as those inefficiencies may impact homeowners, mortgage holders, and renters during COVID-19. Laurie Goodman, Ted Tozer, and Edward Golding offer lessons learned from the Great Recession and observations on what changes could be made to improve the rate of economic recovery as shelter in place orders are gradually lifted.

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Please note this automated transcription may contain errors.

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Richard Green: Good morning, everybody.

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Richard Green: We are still waiting, waiting. One of our panelists. But I think what we'll do is we'll get started now. And when Ted Tozer joins us, we will just patch him in

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Richard Green: My name is Richard green I'm director of the USC lusk center for real estate.

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Richard Green: And I'm pleased to welcome you to this morning's edition of Lusk perspectives which is about vulnerabilities and the mortgage market and it is a real treat.

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Richard Green: To be able to welcome the panel we have to talk to you today because these are three people. I got to work with closely during my year in Washington, DC.

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Richard Green: In 2015 2016 and they are all remarkably good at what they do.

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Richard Green: Our lineup is Laurie Goodman from the Urban Institute, she runs the housing current i guess the housing finance policy center.

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Richard Green: There lots of experience in the walls in the mortgage business Wall Street and then Urban Institute, a font of knowledge on what's going on in the mortgage market.

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Richard Green: Ed Golding Ed was the Commissioner of the Federal Housing Administration and roughly the last two years of the Obama administration before that he ran financial research with Freddie Mac.

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Richard Green: And strategy at Frank back for a good long time and I've known ed for, gosh, it's got to be at least 20 years now and always have enjoyed working with him. And then we're waiting on Ted Tozer from the Milken Institute. Oh, and by the way it is now.

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Richard Green: runs a center at MIT and is also affiliated with the Urban Institute and we will also be joined by Ted Tozer Ted is currently with the Milken Institute and ran Ginnie Mae for about seven years and

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Richard Green: Probably did more to teach me how a mortgage guarantees work than anyone else I've ever known before I met, Ted. I thought I knew how they work.

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Richard Green: Up but it was only after working with Ted that I maybe I should still say only think I know how they work. But what I think I know it's a lot more than I used to think I know

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Richard Green: So we're going to start with an overview from Lori Goodman. And what I'm going to do is share my screen and forward advanced Lori's slides. If she tells me to do so. So Lori. Thanks for being here and

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Laurie Goodman: Thanks very much for having me and

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Richard Green: Let me

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Richard Green: Get my screen up and your PowerPoint up for you.

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Laurie Goodman: Okay, great.

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Laurie Goodman: Okay, actually what advance to the next slide. Thank you. So what I'm going to actually talk about give you some overview on what the US housing residential housing market looks like and then

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Laurie Goodman: back one slide. Oh, this is perfect, perfect. And then talk about vulnerable. I talked about briefly about three vulnerabilities in the system, namely

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Laurie Goodman: What's going on in the non agency market non bank servicers and then the tightening of the credit Fox all three of those themes are going to be picked up by both ed and Ted later. So this sort of gives you an overview of the

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Laurie Goodman: Of the housing of the market size and the housing more of the US single family housing market. You can see it's about $31 trillion

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Laurie Goodman: Of what 19.7 is household equity and the word equity is missing, but it's household equity and 11.2 trillion is debt if you compare this to where we were in 2007

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Laurie Goodman: You can see that debt is not that much different. It's been pretty flat. Whereas the amount of household equity is much, much higher. People are just much better.

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Laurie Goodman: Positioned coming into this crisis than we were going into the great financial crisis, the right side of the page shows the composition of the US housing market. You can see that $11.2 trillion in debt.

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Laurie Goodman: You can you can see 6.8 trillion is

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Laurie Goodman: His agency that is Jenny Fannie and Freddie 3.55 trillion is on securitized first lanes in

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Laurie Goodman: Some securitized first liens and bank portfolios and in portfolios of other players, including Fannie and Freddie about

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Laurie Goodman: Half of about half a trillion apiece. Our home equity loans and private label securities. The next slide shows what origination volume has looked like. You can see about 43% of

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Laurie Goodman: Volume was Fannie and Freddie about 19% was Ginnie Mae 1.2% was private label and about 36% back back one slide.

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Richard Green: Oh,

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Richard Green: Maybe this happened. Okay, I'm going to share and then share again.

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Laurie Goodman: Always stay stay where you are. It's not worth it.

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Laurie Goodman: And about 36% was bank portfolio origination. So just sort of gives you an idea of the government share

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Laurie Goodman: Both sort of in terms of stock and in terms of flow. So, the government shares sort of roughly 60 to 70% of the market. Now let's look at what's happened recently.

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Laurie Goodman: This next slide shows you agency MPs spreads. And so this is the spread between the Fannie Mae current coupon and the 10 year Treasury from

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Laurie Goodman: 2004 to the present. So you can see there are two big spikes and spreads. The first was during the financial crisis in 2007 2008 and the second was very, very recently.

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Laurie Goodman: The right side of the page shows you what's happened very recently. And you can see there's a there's a spike, kind of, it looks like a

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Laurie Goodman: To mountaintop. So if you so basically the so after that for so basically after that when that first mountaintop was reached the Fed came in and said we're intervening we're going to buy up to 200 billion and mortgages.

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Richard Green: go back one slide. Sorry, I gotta restart this because it's

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Richard Green: We had this problem with the presenter, the other day, so let me just get this restarted.

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Richard Green: Sorry about this. Lori.

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Laurie Goodman: So it looks so basically after the first mountain top the Fed said we

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Laurie Goodman: Were going to intervene and then spreads came in and then they went right back out because the amount of intervention that the Fed was proposing wasn't going to be nearly enough in the view of the market.

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Laurie Goodman: After the second intervention, the Fed said it will do whatever it needs to stabilize the market at that point spread stabilized and came in by a huge amount you can see there was basically close to 60 point 60 basis points.

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Laurie Goodman: Jump back and spreads. Now obviously this had some repercussions within the market in terms of, you know, specified pools traded very poorly because they were not guaranteed by the Fed

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Laurie Goodman: I've made hedging very difficult because with this type of volatility. It's very difficult to hedge. But basically, when the Fed came in, they did a great job of stabilizing the agency part of the market that is the 60 to 70% of the market.

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Laurie Goodman: Or the roughly six on the roughly 64% of what are 62% of last year's production that was agencies. However, if we look at what's happened to the non agency market. Next slide.

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Laurie Goodman: You can see that the jumbo market is tighter and the non qualified mortgage or where what's basically most of the private label market is closed. So the MBAs mortgage credit of the NBA doesn't mortgage credit availability and Dax each month. And what they look at is

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Laurie Goodman: Is basically already which is based lending guidelines for various entities and the credit, credit availability index for March fell 16% to the lowest level since 2015

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Laurie Goodman: The government index was down 6.6% the conventional index was down 24.2% and that's because the conforming index was down to 2.7% but the jumbo index was down almost 37%. So the real cutback was in jumbo credit which was much, much tighter.

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Laurie Goodman: The non QM loans, the non qualified mortgage loans are loans to borrowers who have one of the following characteristics either their self employed.

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Laurie Goodman: They rely on non traditional documentation of income, such as bank statements.

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Laurie Goodman: They have high debt to income ratios or they have lower credit scores. Now remember, these are loans that have where the borrower has a lot of equity in the home. The average loan to value ratio and or non qualified mortgage loan is about 70

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Laurie Goodman: These loans, the market closed completely

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Laurie Goodman: The major lenders in the space aren't making loans. So angel oak and set it out, are two of the biggest one are the two largest lenders in the space, they're completely and totally closed.

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Laurie Goodman: Why are they completely and totally closed, they're completely and totally closed because these loans are trading.

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Laurie Goodman: We're trading as low as a price that about have about 84 and are now trading at a price of around 90 that is if you make a loan for $100 and you try to sell it immediately. At one point, you would have gotten as little as 84 as

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Laurie Goodman: $84 for that loan, well, and you're still getting less than $100 for that loan. So if you're going to sell it.

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Laurie Goodman: You can't make it up in volume, if you're if you're originating loans at a loss. So basically, the major lenders in the space are just not making loans at all this market is totally and completely closed.

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Laurie Goodman: Now, actually there's a fairly easy policy solution here and that is you can open tower which is the Federal Reserve's term asset backed securities loan facility to AAA NBS

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Laurie Goodman: Currently asset backed securities commercial mortgage backed securities and see yellows have the highest credit rating are all covered by health but mortgage backed securities or not, which is kind of interesting.

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Laurie Goodman: Second big dislocation in the market and next is on is not not as the non banks are is the non day originator servicers be non bank servicers I'm

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Laurie Goodman: Play a very non banks play a very important part of the market. If you look at this slide, you can see that there are about 86%

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Laurie Goodman: Of Ginnie Mae production there about 60% of Fannie and Freddie could find production and overall. There are about 69% of total production in the market, so non bank origination is really, really important.

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Laurie Goodman: non bank non banks have to advance on their loans that is they have to continue to pay the investor.

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Laurie Goodman: And they don't actually have the cash to do it, even though they're going to even though they're going to be paid back for these advances Ginnie Mae is put into place service or facility.

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Laurie Goodman: To to advance the principal and interest on the loans. The GCS have limited the advances to four months. Even so, the genie advances don't cover the taxes and insurance.

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Laurie Goodman: Payments. And they also don't cover the mortgage insurance premium. So the servicers do have advancing responsibilities and it could be a lot

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Laurie Goodman: So it could be a long time before they're paid back I ed and tell her that both going to talk about this a lot more. But the point I want to make is actually on the next slide. And that's the, why do we care.

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Laurie Goodman: And that is. We care because the non bank originators have a much wider credit box and their bank counterparts, especially for Ginnie Mae. So if you look at the top.

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Laurie Goodman: Right slide. This shows you the median FICO scores for banks versus non banks.

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Laurie Goodman: Remember banks are only about 14% of the Ginnie Mae market, they have much much higher FICO scores than their non bank counterparts.

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Laurie Goodman: They also an basically in both in there's not much of a difference in the fight those scores between banks and non banks in the among the GSA GSA loans, however.

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Laurie Goodman: non banks are also more tolerant and the debt to income dimension as well. You can see they have a much wider credit box there in both

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Laurie Goodman: In both Jenny and also in terms of Fannie and Freddie loans that is non banks are more permissive

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Laurie Goodman: In their lending. So if the non banks are not able to survive this. What it means is more is more credit tightening it will be very it'll be increasingly difficult for those who do not have pristine credit to get a mortgage. Next slide.

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Laurie Goodman: There's going to be much more credit tightening in the months ahead you have you haven't seen it. Now, in terms of the you haven't seen it yet.

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Laurie Goodman: The aggregate level, although you have seen it in terms of what people's rules are for lending.

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Laurie Goodman: But one thing that we did see is because great locks happen.

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Laurie Goodman: After mortgage applications. You haven't seen any. You haven't seen the aggregate data showing the shift mortgage application volume, although it's clearly coming because everyone's tightening

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Laurie Goodman: But you have seen a shift in terms of lower quality lend lower quality loans being charged higher rates and particularly in non banks and you can see that very clearly on the top part of this slide. But again, this is old news because these were rate locks that happened earlier, um,

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Laurie Goodman: There's no question that originators are tightening credit. Big time.

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Laurie Goodman: JPMorgan Chase's announced a minimum credit score of 700 and a minimum down payment of 20% except for cash, except for

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Laurie Goodman: refinancings to existing customers and some small amount of affordable lending Wells Fargo and US Bank of both type their minimum credit score to six at

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Laurie Goodman: flagstar has had its minimum credit score to 640 Navy.

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Laurie Goodman: Credit federal Navy Federal Credit Union has stopped offering FHA loans and better.com and stopped offering FHA loans know jumbos above 80 LTV and they increase the minimum bikers for. So all of this points to increase tightening in the months ahead.

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Laurie Goodman: Now we know that there's been a severe pullback in terms of home purchase activity.

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Laurie Goodman: Listings Redfin shows home so shows their listings down 44% pending home sales down 49%

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Laurie Goodman: NBA Fannie and Freddie all forecast refinancing activity to be much more important in 2020 and purchase activity. So on average, they see purchase activity down 10% rifai activity up 31%

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Laurie Goodman: And this is a huge change from their forecasts in December and January we checked purchase activity up and rifai activity down

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Laurie Goodman: Now you're probably thinking, oh, well, what, what could what could what could go wrong with refinancings that's pretty straightforward.

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Laurie Goodman: But even here, we're not prepared for the virus. So, for example, here's some of the obstacles to refinancing and a lot of loans are going really smoothly, but a lot of originators or

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Laurie Goodman: Have increasing piles of loans that can't be processed for one reason or another.

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Laurie Goodman: And here are some of the obstacles first title searches can't be completed in areas that don't have computer searchable records as county assessor's offices are all closed.

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Laurie Goodman: Verification of employment and confirmation of continuity of income is very, very difficult in this environment.

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Laurie Goodman: Everyone's working remotely records are sometimes not computerized and available and confirmation of continuity of income is very important because if you're a lender, how, how can you guarantee that

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Laurie Goodman: You know that that that the borrower's income is going to continue and they won't be laid off tomorrow traditional appraisals can't be completed automated valuation models can be used as can exterior only appraisals, but some but in many cases.

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Laurie Goodman: You really do need a traditional appraisal in order to process the applications and many states don't accept either voters ation. So these are just some of the obstacles to refinancing in this environment.

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Laurie Goodman: So my task was to talk about vulnerabilities of the mortgage system jack and I pass it back to Richard

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Richard Green: I can't, I'm sorry.

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Richard Green: Is I'm

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Richard Green: Lori. Thank you very much. Are you willing to share that. May I distribute these slides to the grown

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Richard Green: Ups, you know, you're muted.

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Laurie Goodman: Yes, I've let me actually patch up two little things which will take about an hour and then you can email it back to you. I'd like to correct a couple of my typos on the front page.

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Richard Green: Okay, very good. Okay. Thank you Lori.

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Um,

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Richard Green: One of the things you talked about is, and I don't know if here, you want to share this or not but on our call on Monday you showed

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Richard Green: Your team did work on the impact of some of these tighter underwriting standards on the availability of credit which say how many loans that were made in the past would not be made now could you share that with the group.

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Laurie Goodman: Sure, unless unless I had was going to cover that in his presentation.

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Richard Green: And were you going to talk about. Go for it. Go for it.

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Laurie Goodman: Okay, so, so we so basically if you take out the affordable. If you take out

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Laurie Goodman: Sort of. So basically we use JPMorgan Chase's criteria and they are they are by far the most stringent but we figured that 64% of the loans would not have been made.

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Laurie Goodman: That, that is, you know, you're only

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Laurie Goodman: That is if you apply the criteria of and we couldn't test for everything that is they have a dT. That is, if you hate the credit score to 700 and assume a minimum down payment of 20%

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Laurie Goodman: But then you allow everything 97 and over

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Laurie Goodman: As part of their affordable housing program which is which is perhaps a very generous definition, you find that 64% of the loans would not have been made.

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Laurie Goodman: Which is just huge. Now admittedly JPMorgan Chase is the most stringent. But even so, there's going to be huge cutbacks in terms of what the credit box is going to be

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Richard Green: Yeah, and this is this is

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Richard Green: Very scary because again it shows that lenders are being very pro cyclical when we need them to be counter cyclical especially right now, so it's

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Richard Green: It's a this just yet another layer of worry for where we're going to be in the next several months. Can I ask has Ted Tozer joined us.

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Chase - USC Lusk: Is not

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Edward Golding: Know, Ted.

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Edward Golding: Ted has Joe, I will. I've been communicating with Ted. So this is add. So he's made checking the waiting room. He had also called in. But he texted me and said he was on zoom

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Richard Green: He is. So Ted, can you identify yourself if you're

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Chase - USC Lusk: Not gonna be able to do that since he's on mute. I don't see his username. Does anybody know what name, he'd be registered under other than Ted

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Edward Golding: And he may also have a tell I have his telephone. Sorry about the

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Richard Green: Sorry, every number 704 number

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Edward Golding: But he was first on the phone listening in. And then he texted me and said he was on zoom. So I'm

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Richard Green: So we're looking for you, Ted.

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Chase - USC Lusk: I see another account under Edward Edward Golding would that be

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Edward Golding: That would be me logging in twice. I don't know how I did that but

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Edward Golding: God, although you could try to have nice are often

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Chase - USC Lusk: Well, I'll unmute that accountants, you

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Edward Golding: Worked at work, work, work, work. Twins.

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Richard Green: There we go, Ted. Good to hear your voice.

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Edward Golding: Yeah, good. I couldn't find the link sent me his own can really work with us.

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Richard Green: All right. Okay. Well, Ted. Thank you very much for joining us. And again,

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Edward Golding: We're both from Ohio, by the way. So let's shout out to the Buckeyes on the

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Edward Golding: On the phone here. Yeah.

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Richard Green: And I have to tell a story about oh, but first of all before I

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Richard Green: Introduce Ted. If you have questions, and again, for those of you who are new to this because we were zoom bombed a few weeks ago, the way we're handling questions is, we're asking you to email them.

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Richard Green: To Lusk CTR that's Liu SK ctr@usc.edu then I will read your question and acknowledge you um when I read the question. So once again, if you have questions, please email them to Lusk ctr@usc.edu

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Richard Green: And and what the string going to tell about Ted is Ted is was such an extraordinary fine for Judy may that

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Richard Green: My understanding is that john banner. A the Republican Speaker of the House recommended him to the Obama administration and the Obama administration hired him. So Ted, is a genuinely bipartisan certified

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Richard Green: Executive of Ginnie Mae was for seven years. I can tell you, having seen it up close. What an extraordinary job he did as a leader.

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Richard Green: Of that organization fixing many of the problems it had alas, not fixing all of them because he was not permitted to any was very precious

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Richard Green: And talking about some of the problems that we would be seeing with servicers right now. And so it's particularly great to have Ted's insights at the moment. So Ted, please take it away.

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Edward Golding: Thanks, thanks, Richard. Sorry for my my lack of technical skills and appreciate your patience. I'm Richard asked me to kind of talk about the plumbing little bit

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Edward Golding: I thought they were talking with all the issues going on today with the issue around for barons and a lot of discussions around

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Edward Golding: Liquidity I thought maybe to kind of walk you through understanding kind of the payments, the bar makes it worth the money into going you know why that's such an issue. And basically the consumer makes

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Edward Golding: Their, their principal corner their payment all goes to the investor eventually ago may go month they pay it, or making the following month.

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Edward Golding: Interest portion of the payments will interesting the investor portion of their payment is less than they're not rate because you have the

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Edward Golding: Interests of belongs, the investor, which is the yield that the investor is

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Edward Golding: Supposed to earn off the mortgage, but they also have the servicing fee, the amount of money that service who receives to pay for the cost

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Edward Golding: Of your operation hiring the staff worked with the customers and so forth, as well as the guarantee fee that you have to pay to Fannie Mae or

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Edward Golding: Jeannie may have this so basically between 50 and 75% or 35 basis points of the borrower's interest payment will go to guarantee fee and servicing in the residual go to the investor.

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Edward Golding: And then the last part of the payment the bar makes every month. Is there a payment that goes into their escrow account to pay tax insurance.

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Edward Golding: You know, mortgage insurance homeowner's association dues old kind of fees to come out other escrow account. That's the makeup of really the payments that occur.

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Edward Golding: Every month from the consumer that a lot of discussions last couple days about FIFA working with Fannie Mae and Freddie Mac.

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Edward Golding: To cover the shortfall in principal and interest payments to do them to the bondholders, as well as God made me the same announced a couple weeks ago. Oh, that's really an interesting

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Edward Golding: situation we're in right now. Because really, that that announcer is really somewhat because the middle impact because the fact that the way

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Edward Golding: This the p&i payments are determined person with your payments go the investor is determined every month is the fact that

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Edward Golding: Every month in the server sends a file that month and file that shows all their loan, but loans with the current balance of loans. It's as a month end and they use that to calculate their

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Edward Golding: Piano payment or principles of what they have to make sure that every month. So basically, for example, on March 31 service are sending their files to Fannie Mae and Ginnie Mae, and based on that Fannie and Freddie basically

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Edward Golding: Determine if the borrower doesn't just makes her minimum payment or normal payment. What will the principal portion that be and what will the interest portion

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Edward Golding: And that's amount that the service has got to pay for engineering world it would be April 20 and Fannie Mae would be April 2018

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Edward Golding: So basically any principle that comes in from the first either the 18th for Fannie Mae or the 20th Virginia may is actually the call and schedule principle, which means that

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Edward Golding: They're not obligated to pay that for another month but that money goes into their principal interest escrow account that's held for

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Edward Golding: The benefit of Fannie Mae or for Ginnie Mae. So when it comes time to 18th and 20th basically Fannie Mae or Jamie looks at that principle is account for the bank them with him and the positive in the funds from the consumer, they say, is there enough money in there to cover the

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Edward Golding: The money money owed in THERE'S NONE OF MONEY. The service request advanced difference if there isn't that much money or more than the pain free to draft.

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Edward Golding: And then a month they need out of that account. So what Fannie, Freddie. We're talking about doing is, it was the shortfall. They would lend the money to the server, sir.

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Edward Golding: But reality, they will have become an issue because we have so much refinancing going on right now because based on some information that Black Knight put out

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Edward Golding: For example, right now, for every loan in a Fannie Mae pool that pays off the model unscheduled principle that comes through that.

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Edward Golding: Will cover the principal interest payments 498 loans that are delinquent and for a JD may alone poor any gym a loan. The pays off will cover the principal interest for 203 loans.

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Edward Golding: So because again the example I'm using. So for example, if a person is PAINT. I PAINT preferred treatment is $1,000 but the lumping paid off.

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Edward Golding: Is 200,000 then you have all that extra money to cover it. So in reality in today's world service was telling me they have more than enough money coming in every month.

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Edward Golding: To make their principal payments, even though delinquencies are increasing because of the amount of forbearance. So because of that the the January and Fannie and Freddie announcement is really

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Edward Golding: Important if refinances slowed dramatically or stop. But in today's world, it's really more of

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Edward Golding: An academic type of announcement. The biggest challenge we have is the comp. The other parts are not covered by Fannie, Freddie announcement. That's the service and fee.

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Edward Golding: And a lot of people talked about as much as 25% loans can be forbearance and under the cares act and federal law that

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Edward Golding: Required for parents to go up to least be six months can be as long as a year. So, do some analysis on the service and fees. What I found is that under

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Edward Golding: The impression Black Knight that under the Fannie Mae portfolio is the servicing fees will be there will not be collected, if we are 25% for parents.

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Edward Golding: Or six months is $1.7 billion in the service fee for Jenny method we forgotten is 1.2 billion. So basically, those $3 billion and servicing fees will not be collected

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Edward Golding: If we don't have some way to get those servicing fees paid for through some sort of liquidity.

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Edward Golding: Advance process where that money is covered, because once the bar makes if there were born payments. The those sorts of fees will, we will accrue to the servicer when it comes to guarantee fees Fannie Mae requires a guaranteed be paid separately outside their monthly

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Edward Golding: Principal interest suit, what they do and the same number. They're based on what my calculations are the amount of guarantee fee Fannie Mae

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Edward Golding: That the server. So search come out of pocket for for that six month forbearance print form, send the portfolio. We $2.3 billion.

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Edward Golding: And JD make charges six basis points annual guarantee fee and there's the same thing is charged outside their normal principal interest sweep.

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Edward Golding: Be $230 million. So between the two that you're talking to and a half billion dollars in guarantee fees that a little bit after you come out of the corporate

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Edward Golding: Advances and under Texas insurance, you're in a situation where the escrow deposits for end of the GC sign that's approximately $41 billion.

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Edward Golding: And on the journey side we approximately $22 billion with that is the amount of escrow deposits that would not happen in the

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Edward Golding: Lord Chucker they would have to be advanced for the servicers because every month they have to pay mortgage insurance with the loans or 80% LTV and the confessional side and for down the

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Edward Golding: FHA loans they have to pay 35 basis points worth of MIT FHA, as well as whenever the property tax.

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Edward Golding: Or homeowners insurance comes do. So the real challenge. I think we have in today's world is how we deal with the service fee.

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Edward Golding: The escrow deposits and the guarantee fees. It's not the principal interest. Because we're such a unique situation.

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Edward Golding: Where refinances are still viable because it's situation where there's plenty of equity in people's homes.

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Edward Golding: And the vast majority of Americans are still working. So they still, they still can do a refinance in today's historically low interest rates compared to 2009 where the refinances stopped.

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Edward Golding: As well as delinquencies going up, which was a toxic combination INTO THE EIGHT, NINE today. The refinance and unscheduled it's a balance.

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Edward Golding: It's really bailing out the servicers when it comes to their monthly p&i accounts. And what did you pay for their p&i defending Fannie Mae and the gentleman.

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Edward Golding: So that's kind of the challenges I see today when it comes to the plumbing in the liquidity that's out there that especially independent mortgage bankers are facing in today's world.

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Edward Golding: So that's, that's kind of what

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Edward Golding: Almost prefer to

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Richard Green: Let me in. Before I put you on the spot. Let me again remind people that if you have questions, please send them send them to lust CTR that's L you SK ctr@usc.edu. So tell me, put you on the spot. If you're a mark Calabria, what do you do right now.

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Edward Golding: Well, I mean, I think there's Kelvin can do

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Edward Golding: First of all, again, he did the most obvious thing would he did do a day where he

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Edward Golding: Allowed Fannie, Freddie to make a lender, the lender, the shortfall for the p&i sweet, even though, in theory, that's kind of knocking with that big a deal. The other issue is to have feigning Freddie do the same thing.

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Edward Golding: That every case authority to do is to do partial claims and actually accelerate the reimbursement, because all these fees, all these advances for

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Edward Golding: For the escrow account all their monies for guarantee fees. All this those fees will be reimbursed by by Fannie and Freddie eventually. So the question is, can they accelerate that reimbursement. So that literally that happens.

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Edward Golding: Now versus six months or a year from Arizona. What happens is once it forbearance periods over six months or a year from now, and the borrowers can repay Fannie and Freddie will usually reimburse the

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Edward Golding: servicers for all the football and payments. So my question is a lot of pain free to accelerate that reimbursement

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Richard Green: So thank you, Chad. Um, so to sort of integrate everything we've heard to this point and hit on a few notes of his own. Let me turn it over to Ed golden

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Richard Green: As I said before, Ed was a in charge of financial research with strategy at fray back for a very long time and has since moved on to MIT and the evidence to has taught a Columbia taught at Princeton.

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Richard Green: And, again, has probably as deep knowledge of mortgages anybody in the world. So at. Thanks for being here.

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Edward Golding: Thank you. You prove I can't hold a job.

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Edward Golding: On that and so he's good to see my friend, Tad even appease using my name.

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Edward Golding: On that, let me just cover three things quickly. I want to talk a little bit more about the single family market and with little focus on FHA

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Edward Golding: I do want to talk about the rental market we forget, most of you don't. But many of us forget that one third of the households are renters. And in fact, our hardest hit, but in this

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Edward Golding: Pandemic for variety of reasons, but then sort of look forward on to the economy and sort of see what we need to do to get everything restarted as quickly as possible on that. So you heard from both Lori and Ted about

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Edward Golding: You know, sort of the pipes and the forbearance programs, let me sort of back up to 2008 and if we learn one lesson was that lowering people's payments on their mortgage is the most effective way of keeping people in the house.

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Edward Golding: We last thought there were about 5 million foreclosures in the Great Recession. I think many of them, most of them probably could have been avoided if we adapted faster.

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Edward Golding: On that you're very slow to react and it was very hard to get a refined i a really free file is very hard to get a modification and what we've done this time with before barons is almost make it just a click and that you can then get a forbearance.

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Edward Golding: Very easily if you just basically say you've been affected by the pandemic very little documentation. We already see the uptake.

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Edward Golding: On the Ginnie Mae FHA, VA sighing close to 10% I think a lot of forecasts say that about 30% of borrowers will take some advantage of that. That's roughly 3 million borrowers on the FHA, VA side.

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Edward Golding: And on the GMC side, the numbers are, you know, a third to a half of that we have about 5% they've already taken up for barons, it probably will go up, you know, to about 10% but it's getting that it's basically just an interest free loan.

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Edward Golding: To the borrowers to help them out during this crisis, and that makes a lot of sense because the Fed has basically pushed interest rates to zero.

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Edward Golding: And what better mechanism than the mortgage market to be able to transmit those zero percent interest rates to the homeowner, they still basically it's an interest free loan.

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Edward Golding: And what happens at the end of the forbearance, whether you pay it back right away, whether you get five years, whether you get the life of the loan will be determined by the individual circumstance, but it was very important to get people who might need those funds, a reduction very quickly.

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Edward Golding: It has definitely created problems in the mortgage market that TED has talked about, because there are folks that he to advance the funds and in many ways, the system is set up.

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Edward Golding: Janet, whether it's Ginnie Mae FHA, VA or the GIC those funds can be advanced and I think the other lesson that we, I think learned last time.

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Edward Golding: But it's not being done as clearly as it could have been is when you're addressing financial crises.

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Edward Golding: It really should have been important to get a lot of confidence, a lot of certainty into the system. And I think the one thing I'd fault FHA, and maybe others for

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Edward Golding: Is sort of dripping out, they will eventually solve the problem, but they've made the market very uncertain about how quickly or how they're going to solve it.

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Edward Golding: And it's sort of the advancing of the funds that TED talk about. So I think making sure we avoid foreclosures are very important. The forbearance plan is a way of doing that we really need to provide more certainty as to who's going to pay when that Ted Talks about

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Edward Golding: Let me switch quickly to the rental market because, you know, this one's a little bit more problematic.

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Edward Golding: And people have studied us and I think Lori will chime in. Because urban I know has done some of it, but many of the people hit by unemployment in the crisis.

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Edward Golding: For variety of reasons, tend to be the people who are more likely to be renters. And the question is, how do we help them. We do not want to be affecting people

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Edward Golding: During this period of crisis. And so obviously one way of helping people who are unemployed is just extending unemployment insurance. And we've done that at least through July, an extra $600

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Edward Golding: But there's a lot of talk about how to provide rental relief.

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Edward Golding: Beyond that the cares act did a small amount of eviction protection if you have a federal mortgage. That means, sort of a multi family FHA or GIC mortgage, there's, I think 6090 days of eviction protection.

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Edward Golding: Built into the cares act, but there's been a lot of talk now in

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Edward Golding: Basically passing legislation that will provide additional assistance to renters and I think there's a real divide on how to do it.

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Edward Golding: Do you try to provide the money directly in the form of rent vouchers, for example, to the tenants or do you basically as we've done for small businesses, you try to pass the money on

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Edward Golding: To the owners of the properties and basically make up for their last rent when people aren't being able to pay rent. And so while we attack.

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Edward Golding: The system on the owner side you're on the homeowner side where a lot of the pipes already existed through FHA, and he may Jesse's unfortunately the pipes don't exist to get money is easily

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Edward Golding: To the renters or to the owners of the properties. I think there is discussion of how to further

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Edward Golding: Provide a to that. Let me just sort of a wrap up with sort of what's the effect on the economy when we, you know, when the pandemic passes.

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Edward Golding: How quickly will the economy, come back, and here's one where I think I'll reiterate some of the data that Lori showed you

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Edward Golding: You said you see a very procyclical mortgage market right now with people pulling back on credit

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Edward Golding: And the real question I have is, how fast is that going to be reverse are all those overlays that are in the mortgage market, are they going to be lifted as quickly as they were put in place.

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Edward Golding: And, you know, in many ways, we have developed a mortgage system that has become more procyclical over time, back when I started in the mortgage business many years ago.

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Edward Golding: If you're asked anyone wants the capital requirement for mortgages, they would give you. They would rattle off one or two leverage ratios.

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Edward Golding: We now have very sort of risk based capital that encourages when RISK GOES UP PEOPLE TO PULL BACK MORE. And I really worried that the mortgage market that we've set up.

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Edward Golding: That Lori and Ted have talked about are not going to loosen very quickly and we will see very tight credit and that will spill over to lower construction.

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Edward Golding: Fewer mortgages and basically a real break on the economy coming back quickly so

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Edward Golding: Something that policymakers will really need to focus on how do we get credit started again the question. You know, it may not be that light switch back on either and that is of concern and I see Lori wanting to chime in. So I will leave it with that Richard Laurie.

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Richard Green: Laurie. Go ahead.

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Laurie Goodman: No, I was actually just going to pick up on what events themes, if you don't mind. And that was on the renter side, you know, as I mentioned, the pipes were in place to do more on the homeowner side and they have with basically forbearance, pretty much available for the asking

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Laurie Goodman: And sort of interesting that we've done a lot less for renters.

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Laurie Goodman: That is the cares act for some for some renters skims for gets a certain amount of eviction protection, but it doesn't pay the rent.

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Laurie Goodman: And there are no provisions to pay the rent or forgive the rent or whatever. And it's important to realize that there are 78 million homeowners. They have an annual income of $78,000, on average, there are

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Laurie Goodman: There are about 44 million renters. They have an annual income of $41,000 so just to hear. So we've done

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Laurie Goodman: Last four and their, their unemployment rate is high, the unemployment rate of renters is higher. To begin with, and many more of them are in industries, particularly service industries that are affected by covert 19 so I just, you know, sort of water just reiterate that point there.

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Richard Green: Yeah, and I'm the estimates. I've seen is the cost of providing rental assistance so that people basically would be in the same position they were before, which is to say they pay

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Richard Green: No more of their current income and they paid of their past income would be about seven $8 billion a month and

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Richard Green: You know, until two months ago, people would have said that's a lot of money, but now in this world that feels like not all that much money.

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Richard Green: And it would be very helpful to the landlords as well into the lenders. Because if people get rental assistance, then they'll pay the rent and if they can pay their rent, then the landlords can pay their mortgages.

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Richard Green: And it and it makes the whole chain work better and I was just doing a back of the envelope. If you think about six months have forgiven interest on about $7 trillion of loans.

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Richard Green: Let's say that's a 4% annual rate on average the loans outstanding that's 20 if I'm getting my orders of magnitude right and

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Richard Green: That's 28 billion a year. So that's 14 billion over the six months of relief that people are getting and and i i think this is absolutely the right thing to do, but

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Richard Green: We might want to think about the magnitude of that relative to the magnitude of what we're giving

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Edward Golding: And the rental market in forbearance is not forgiveness. So the question is, how much of that will be paid back. I think I

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Richard Green: Don't know I

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Edward Golding: Decided loan.

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Richard Green: But, but, as you said, their, their interest free loans and so I'm, what I'm getting at is not paying interest for three months or six months. That's a subsidy.

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Richard Green: Yes. And I'm not complaining it, but I don't think I'm not complaining about it being I'm glad it's there, but that is, you know, multiply the mortgage debt outstanding by the interest people aren't paying you know that's real money to

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Richard Green: Let me ask you know an issue, none of you have brought up that sometimes people mentioned to me and and again on our urban call on Monday morning it was brought up as the issue of moral hazard.

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Richard Green: People taking advantage of these programs that don't really need to take advantage of them. Let me ask any of the three of you how worried if at all, are you about that is a problem.

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Edward Golding: I'm not worried that much about push from the consumer perspective, because this is not because the thing that I thought was really interesting was talking to a major servicer and he was telling me that

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Edward Golding: Basically 10% of their loans and forbearance now under the cares but interesting about an elder 10% 2% or 2% of the loans overall portfolio. They're still making payments on so it's almost like the consumer wants to make the payments.

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Edward Golding: If they can, but they're trying to get ahead of the game, but getting all the paperwork setup and so forth. So they need to forbearance, it's there. But to me, I thought was really

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Edward Golding: Unusual in this person was same thing that people are actually coming in and making their payments, even though they could very well for birth prepare the payments.

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Edward Golding: They're not doing it. So to me, I think the average consumer wants to make your payment if they can. It's only if they can't do it that they're not gonna make your payments. So to me, I think the chances of having moral hazard from a consumer perspective, I think it's somewhat minimal

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Laurie Goodman: I think one thing we learned from the 2007 2008 experience is that

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Laurie Goodman: If you try to combat moral hazard, you end up putting a lot of rules in place in terms of documentation and all that it takes much, much longer.

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Laurie Goodman: And you end up being very delayed and getting help to the people that needed the most and that cost is far, far greater than the small amount of moral hazard that might be introduced to the system.

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Edward Golding: And Richard I know you know this very well. But you know the term moral hazard is sometimes not that well defined.

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Edward Golding: I mean, the last crisis, you could point to people buying their, you know, third home that shouldn't have bought that they're at home.

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Edward Golding: And so there was an activity that people you if you have money, you should have monitor that. And you should have a restricted the activity.

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Edward Golding: I can't you know there isn't there may be some transfers to people who you think you know aren't the most needy in this, but it's very hard for me to actually see technically where anything that even borders on moral hazard.

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Richard Green: Yeah.

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Edward Golding: I mean the income distribution at the end of this, you know, maybe you, you may look at it and say, you know, why did Harvard get money or so even though it was legal that Harvard commit moral hazard by taking the provisions of the Act.

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Richard Green: You know,

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Edward Golding: We can debate whether the act.

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Edward Golding: was appropriate, but I wouldn't, you know, no one is saying Harvard conducted, you know, did something that you know lacked morals or was a moral hazard in that

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Edward Golding: I don't even like the term on here. I don't see people doing things they shouldn't do.

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Richard Green: Well, I mean, this is what it is rare instances where we really have had an exogenous of it.

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Richard Green: Is people are in trouble, not because they did something wrong. It's because, sort of, well, a disease truck.

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Richard Green: And I even think about, so sit servicers we were talking about earlier, or a group for whom I often don't have all that much sympathy. But when the government mandates that you for bear

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Richard Green: That means that you're being mandated not to collect income that you ordinarily would be collected and so to do one thing would to mandate such a thing without some provision.

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Richard Green: On the other side seems you're on a Tony are responsible. It's not that people are deciding not to go to work. Like I find some of the debate over current levels of unemployment insurance little silly.

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Richard Green: Is that they're being told they have to stay home. So it and and yeah I mean I'm sure that people can find specific examples of

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Richard Green: People taking advantage when they shouldn't be taking advantage but it all seems not even second order but third order to me at this point.

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Richard Green: On which is i'm glad why all three of you agree with me on that point, but I did not stack the panel. For that reason, we do have a question from the audience. This comes from Frank bird.

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Richard Green: How do you see the impact of this crisis with regards to homeowners versus renting playing out regionally to the more expensive coastal urban areas struggle longer than the middle America. America as the economy evolves to its to reality.

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Richard Green: I'll open that up to anybody.

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Laurie Goodman: So yeah, I'll take the first shot at it.

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Laurie Goodman: Yes, I do think

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Laurie Goodman: You know, we do see the areas that are hardest hit by this, which in many cases were already already marketed by the salt taxes. So, you know, you sort of think about

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Laurie Goodman: California, you think about New York, New Jersey, Connecticut, all of what you've been hard hit by boat by both things and you were already say, I mean, those were already states that we're experiencing existence in terms of

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Richard Green: And Laura, let me

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Laurie Goodman: Because

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Richard Green: I have it. That was true before the salt duck.

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Laurie Goodman: Yes, you are already saying as it is. I think there was accentuated after the salt, particularly, you know, in the Northeast, you are already

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Laurie Goodman: Saying that outward my men outward migration rate accelerated, particularly for those that were

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Laurie Goodman: more affluent and then the result was that you were you had you're already experiencing fairly large home price declines in places like Connecticut parts of New Jersey, even before this, and I think this definitely changes the dynamic about living in sort of the large super cities, actually.

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Edward Golding: I might just

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Edward Golding: Add you know

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Edward Golding: The other thing that

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Edward Golding: California, New York, in particular, always had people leaving it or not always but recently and had a big infill from migration.

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Edward Golding: That we've cut a

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Edward Golding: Migration migration and immigration migration.

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Edward Golding: Has changed dramatically. And I think we haven't figured out whether that's you know how permanent I said OVER MULTIPLE ADMINISTRATIONS. And what will that affect because the pocket the innate population growth in this country is basically zero if we don't bring immigrants in

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Richard Green: So let me. So there's a specific question from for Lori and then then we're gonna have to wrap up.

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Richard Green: Because I have to go to a faculty meeting.

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Richard Green: It's from Michael banner and what Michael asks about the historic disparate access to mortgage lending for ethnic borrowers being a

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Richard Green: Barrier to wealth building what policy recommendations would you prescribe going forward to minimize the this being accentuated in the next year.

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Laurie Goodman: Yeah, so I mean this is something I worry about a lot and i agree i mean sort of owning your home is sort of is the best single way to build wealth.

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Laurie Goodman: And so, I guess, you know, we were very slow, you know, obviously credit was way too loose in 2007 2008 and gotten what a got way too tight and loose and marginally but it was still

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Laurie Goodman: Too tight and what I worry about is every single thing we everything that's coming out of this crisis is going to make it even

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Laurie Goodman: Tighter so you know FHA is a critical channel for lower income and minority borrowers, some of the actions that are being talked about there like

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Laurie Goodman: limiting the use of government downpayment assistance are just scary.

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Laurie Goodman: And I'm not aware of any evidence that really shows that loans with government downpayment assistance perform any worse than loans with your family downpayment assistance and obviously minority borrowers are less and less able to

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Laurie Goodman: Access family well so leaving that down payment check to leaving that down payment assistance channel open and in fact opening it even more. I think is really critical. Second thing I think you should be, you should be doing is

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Laurie Goodman: Sort of thinking more broadly about credit scores, because your biggest the biggest expenditure each month for someone who rents is their rent that rent.

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Laurie Goodman: Is not normally picked up by the credit bureaus, so it doesn't count towards your credit score bureaus pick it up. They count it, but they have like less than 1% of

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Laurie Goodman: The rents covered if you don't pay your rent in your paper you're taught to return over to a collection agency, then it's counted negatively, but sort of accessing bank statements and counting rent payments.

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Laurie Goodman: Towards one credit. I think could be very, very powerful. And then finally, sort of looking at bank statements to count gig income.

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Laurie Goodman: Because a lot of times minority borrowers have two or even three jobs to try to keep that to keep the income flowing

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Laurie Goodman: And we're not picking that up and sort of our standard measures of income. So sort of so so looking at bank statements more broadly to assess capacity to repay, I think is really important.

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Edward Golding: Richard very quickly. I'd go one step further. I mean, just like we did a GI Bill after we after world war two that benefited. My father tremendously and put them on the road to homeownership

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Edward Golding: There are a lot of the first line people in this in this in this effort in this pandemic, you know, whether it's the transit workers or the nurses or or the like, and we know the by infection rates.

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Edward Golding: A lot of those tend to be communities of color who have been on the front line. Why not sort of extend

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Edward Golding: A downpayment assistance type program to all the people who helped battle this virus. And in many ways, I think that would help on homeownership rate when a lot of these communities.

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Edward Golding: And I absolutely agree with Laurie, we should not do any harm. And we are doing harm, but I think we should go a step further and really address the issue head on.

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Richard Green: And I think it's worth noting here is the VA Loan Program has been for years. The safest loan program out there. It is a zero percent down payment program and through the global financial crisis VA loans performed better than any other kinds of loans. Now they're very well underwritten

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Richard Green: But it shows that you can make a zero down payment product, a very successful product. And with that, we're past the top of the hour. So I have to let people go, let me just note that our next

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Richard Green: Less perspectives will be done on Monday, the 27th at 1pm Pacific time we're looking forward to having Claudia song.

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Richard Green: Claudia was with the federal reserve for many years was with the Council of Economic Advisers, again, that's when I got to work with.

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Richard Green: Claudia. The Adventure of the Somme index, which is the first a real time index of recessions that actually really work. She now runs research for the Washington center for equitable growth.

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Richard Green: And then next Wednesday the 29th will have Alex Levinson from the Marshall school discussing effective organizations in times of crisis.

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Richard Green: So we'll look forward to seeing you all at those two meetings. Next week TED Ed and Lori. Again, thank you very much for giving us an hour here today. Always great to see the three of you and we'll look forward to seeing you all next week. Thanks for coming.

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Edward Golding: Thank you Richard

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