INSIDE ECONOMICS

Mark Zandi:                       Welcome to Inside Economics. I'm Mark Zandi, the Chief Economist at Moody's Analytics, and I'm joined by my two co-hosts, Cris deRitis and Marisa DiNatale. How are you guys?

Cris deRitis:                        Doing well. How are you, Mark? Welcome back.

Mark Zandi:                       It's good to be back.

Marisa DiNatale:              Oh, you're back, yeah.

Mark Zandi:                       I am back. Yeah, I came back early. I was in London and I was supposed to go off to Dubai, but that part of the trip thankfully got canceled, so I came back home. I'm actually back home. I'm really very excited about that. But you know what I learned while I was in London that I didn't realize was that everyone hates Brexit now. Like everybody hates Brexit.

Marisa DiNatale:              Really?

Mark Zandi:                       Yeah. And I go, "Well, what happened? Back in 2016 they voted for Brexit, so what happened in the last seven, eight years?" The answer was, "The people who voted for Brexit largely have died." Apparently it was an older group of folks, and they're gone. Everyone who remains says, "What in the world happened here?" I was surprised.

                                                Now, of course I was in London and I think in the financial district, and most folks there never really liked Brexit, so maybe it's a little bit biased. But they were saying that if they look at polls across the country, everyone is saying they don't like Brexit. So then the next obvious question is, "Well, can you get back in?" The answer is, "Not in two generations."

Marisa DiNatale:              Not easily.

Mark Zandi:                       Not easily. I didn't know this, the rule is, if you want to get back in, you now need to adopt the Euro as your currency. So if British want to come back in, they got to give up the pound, which I don't know, I don't know. But I found that fascinating and I think-

Marisa DiNatale:              Yeah, that's interesting.

Mark Zandi:                       ... you can see it, I mean, you can feel it. I mean, the one reason why their inflation is more persistent, it goes back to wages, and that goes back to a very tight labor market, and that goes back to they just aren't getting the immigrants from the rest of Europe to come in and help out, so very tight labor market. I found that very fascinating.

                                                But anyway, good to be back. We've got a guest. I'm going to keep a little suspense here, I'm not going to introduce her right away because I wanted to ask you guys one question before we move to her, and that is, because I have been away, I haven't been able to keep up. What's the big economic news of the past week or so? What's at the top? I know lots of stuff going on, but what's at the top of the... Cris, is there anything you want to point out?

Cris deRitis:                        I'll point out oil prices.

Mark Zandi:                       Oil prices.

Cris deRitis:                        Prices down to $76, $77, thereabouts. They had been in the 90s in September, so that's certainly providing a little bit of relief to consumers, you would think. That's certainly a positive. There are certainly others, I won't steal Marisa's thunder.

Marisa DiNatale:              Well, you just did.

Mark Zandi:                       Oh. Oh, really? Okay, good minds think alike.

Marisa DiNatale:              I was going to say oil prices, yeah.

Mark Zandi:                       Just a few weeks ago, I think they were over $90 a barrel, and it felt like they were headed north.

Cris deRitis:                        That's right.

Mark Zandi:                       Israel, Hamas, worries about that spilling over into Iran and the rest of Middle East, Saudi was cutting production, so forth and so on. But it went in the opposite direction, so we're now down below or close to $80 a barrel?

Marisa DiNatale:              It's like $75 on WTI today.

Mark Zandi:                       On WTI, West Texas Intermediate.

Cris deRitis:                        $77, yeah.

Mark Zandi:                       That's a big plus. So what's gasoline prices? Does anyone-

Cris deRitis:                        $220, I think was the...

Mark Zandi:                       Oh, no, that would be wholesale, not retail.

Cris deRitis:                        Wholesale. Wholesale.

Mark Zandi:                       Yeah, wholesale would be $220.

Cris deRitis:                        Oh, my local Wawa I think was at $3.60 yesterday.

Mark Zandi:                       Well, it's at Wawa. If it's Wawa, it's got to be the nationwide price for sure. Yeah, $3.60. All right. Okay, good. So that's a real plus, right?

Cris deRitis:                        It is.

Mark Zandi:                       I thin, right? Yeah.

Cris deRitis:                        It's on our risk matrix as a concern. Certainly if higher oil prices would knock down consumer confidence, so keeping them low and stable is definitely a plus.

Mark Zandi:                       Of course, they can go up as fast as they came down.

Cris deRitis:                        They certainly can.

Mark Zandi:                       Right, so I got to watch that very carefully, but we'll take it for the time being, that's good. And we get a consumer price index report next week on Tuesday. I think that should look pretty good, at least the top line, because gas prices are down from where they were a month ago. That should really help out here.

Cris deRitis:                        Yeah, so down 15%, right? From September.

Mark Zandi:                       Yeah, good. Good. All right, sorry about that. Did you want to-

Marisa DiNatale:              That's okay.

Mark Zandi:                       Anything else on the front burner here in terms of your views of the economy?

Marisa DiNatale:              Well, kind of related to oil prices, why have they fallen so drastically over the past month? The Chinese economy continues to weaken. We got consumer price and producer price reports for China, and they were both negative. So we have deflation in China, and that's potentially part of the reason why we're forecasting lower prices is because we're expecting weaker demand from China over the course of the next six to nine months.

Mark Zandi:                       So I didn't realize the Chinese, I thought the Chinese economy was kind of finding its way back, but no?

Marisa DiNatale:              Doesn't look like it.

Mark Zandi:                       Not in terms of demand, I guess.

Marisa DiNatale:              Very weak demand, yeah.

Cris deRitis:                        That's right.

Mark Zandi:                       Interesting. Good. I guess so in a kind of weird way, China's problems are a good thing for us?

Marisa DiNatale:              Helping inflation.

Mark Zandi:                       Inflation side. We'll take it, I guess, right?

Marisa DiNatale:              Yeah.

Mark Zandi:                       Everything we can get. Okay. I was just going to point out long-term interest rates, right? I mean that was the other thing, just a few weeks ago, maybe it was even a week ago or two, really a lot of hand wringing around 5% tenure treasury yield. We had 30-year fixed rate mortgages up to 8%, and that felt pretty scary. And that was like oil prices, they had gone up and it felt like they were going to go even higher, but they've kind of come back in as well. The 10-year yield last I look was 4.50%, 4.6%, something like that. I think 30-year fixed rate mortgages are still very high, but they're back down to about 7.5%, so that should be helpful. So it feels like all the economic news, sort of good news in its totality.

Marisa DiNatale:              Stock markets.

Mark Zandi:                       Stock market, yeah. Okay. Okay. All right, well this might be a good time to bring in our guest, and I'm really happy to be able to have Teresa Bazemore join us. Hi Teresa, how are you?

Teresa Bazemore:           Hi, mark. Good to see you.

Mark Zandi:                       Yeah, it's very good to see you. And you're hailing from a hotel room in Philly, and I feel a little weird. I'm not showing any hospitality. When you were flying over from, you're from LA, you were in LA, you were flying from LA I think, and you sent an email and I felt really bad because I can't invite you to anything because we're remote. You can come to my home in the suburbs, so I feel a little bad about that. But welcome, welcome to Philadelphia.

Teresa Bazemore:           It's really fine. Thank you. So as you know, I came in town yesterday because my husband was being inducted into his high school's hall of fame, which was fun last night, so yeah.

Mark Zandi:                       Norristown High, he went to Norristown High School.

Teresa Bazemore:           He did.

Mark Zandi:                       I went to Upper Merion High School.

Teresa Bazemore:           Oh, okay.

Mark Zandi:                       I think Norristown just beat our butt continually.

Teresa Bazemore:           Probably.

Mark Zandi:                       Yes, right.

Teresa Bazemore:           Especially when he was there.

Mark Zandi:                       Yeah, yeah. You were telling us a story, he had a runback of 103 yards, like a record.

Teresa Bazemore:           103 yards. Yeah. It's one of the top records in Pennsylvania apparently, so.

Mark Zandi:                       Wow, that's pretty cool. And when you told me that he was getting inducted in the Hall of Fame, I googled you to find him, and I saw this WHYY, which is the local NPR station, did this piece called The Batman of Norristown. You want to explain that?

Teresa Bazemore:           Yeah, so a few years back, we've both been supporters of Habitat for Humanity, and I did it separately, but also through the MBA, which had a large focus on habitat. So we worked with the Montgomery County Habitat affiliate and committed to help them with acquiring houses and to giving them the money to fix them up. So because it was sort of one where we'd find a house, do it, and then they find the next house and we'd do it, they called him the Batman of Norristown because it's so like Batman coming in to help whenever the need arose.

Mark Zandi:                       Very cool. Very cool. Congratulations. And I just realized, I just assumed everybody knows who you are, but you're the CEO of the San Francisco Federal Home Loan Bank. And we go back a long way because, are you a Philadelphia native? I don't know if you're-

Teresa Bazemore:           I'm not. I'm actually a native of Virginia.

Mark Zandi:                       Virginia, okay. But you've lived in Philadelphia? Well, for many years.

Teresa Bazemore:           For a while. Yeah, I actually came to Philadelphia in 2006. So I had been involved in a startup in St. Louis that was with former colleagues from the Prudential, and we built a state-of-the-art mortgage platform. In fact, you could get approved on our platform online back in the early 2000s. So it was kind of before Rocket Mortgage, and it was a private label business for credit unions and banks, independent mortgage banks. And we sold it in 2005 to MBNA, which promptly sold itself to Bank of America.

                                                And I had left Bank of America to do the startup. I had been running legal for mortgage and the Community Development Bank while I was there, and that's when I decided to join Radian. That's when I came to Philadelphia in the fall of 2006. And I think the funny part is I had two other offers. And so even with all of the craziness during the crisis, my other two offers, and don't take any offense, Cris, is they were from Fannie Mae and Lehman Brothers.

Mark Zandi:                       Good choice.

Marisa DiNatale:              It was well.

Mark Zandi:                       Yeah, good choice.

Cris deRitis:                        Maybe things would've worked out differently if you-

Teresa Bazemore:           Well, you know, we'll see.

Cris deRitis:                        We needed you.

Teresa Bazemore:           It was a good opportunity, I learned a lot at Radian, which was terrific.

Mark Zandi:                       You said MBNA, that was the credit card company? They were-

Teresa Bazemore:           Correct, correct. So were actually, they were trying to do mortgages, but they were affiliated with a couple of other firms, and they wanted to build out sort of a private label mortgage platform. That's exactly what we had done. And if you think about their credit card business, their credit card business, they had a huge private label credit card business. So we were supposed to become the mortgage platform, if you will, for them. It's just that right after we were acquired, the deal happened with Bank of America, which was really a credit card deal. And they had looked at our platform before and they decided that they wanted to actually take our platform and put it throughout Bank of America. And so the private label part of the business went away and they started working on that. And unfortunately because of the countrywide deal that happened maybe a year or two later, a couple years later, that all got put on ice because it was just too much to try to put... Integrate countrywide into Bank of America's mortgage business and try to put up a whole new platform across both-

Mark Zandi:                       A bummer. So this baby you built kind of just went into this behemoth organization and this kind of got lost.

Teresa Bazemore:           Yeah, actually while I was at Radian I tried to buy it, but they wouldn't sell it.

Mark Zandi:                       Right. And of course, Radian is a large private mortgage insurance company, and I can think that's how I got to know you a bit, because on the board of MGIC.

Teresa Bazemore:           Correct.

Mark Zandi:                       And this was before my time, maybe you were there, but MGIC and Radian were going to merge, I think at one point.

Teresa Bazemore:           Yeah, so those discussions, so think about it, I had been through a lot of mergers at Nations Bank, the Bank of America merger, and I'd gone to do this startup and we sold it to MBNA, and then there was a merger, which brought me to Philadelphia. And I hadn't been in Philadelphia two months when we started having those merger discussions. And I was the general counsel of the holding company. So I was heavily involved in negotiating that deal, heavily involved in also the decision when both companies decided to walk away from the deal, which I think was the best thing given what was going on at the time.

                                                But yeah, and in fact, when we announced the deal it was early February of 2007, and our chief risk officer left, and I ended up becoming the chief risk officer in addition to the general counsel. And not only did we have a mortgage insurance business, but we also had a financial guarantee business out of New York that did a lot of AA credits for munis, some reinsurance business, a lot of wrapping of bonds for colleges and community hospitals. So kind of a vast array of lines of business. There was also international business for both the MI business and the financial guarantee business. So my initial focus when I took over the risk function was on the financial guarantee company because those are large deals that you're doing each time. And then I really had to pivot to focusing on how we change the underwriting guidelines for the mortgage insurance business.

Mark Zandi:                       Wow. When did you leave Radian? When was that?

Teresa Bazemore:           In 2017.

Mark Zandi:                       '17. So Radian had gone through the crisis, survived like all the other MIs, and you had it on solid ground and you said, "Okay, now time to get a rest," I suppose.

Teresa Bazemore:           Yeah, and I was really, one of the things I'm most proud of from the time at Radian because I became president of the mortgage insurance business in July of '08, is that we actually navigated our way out of it. And we also had the highest market share, which had never happened at Radian before, which is kind of a real feat, I'm told, to do that. But it was a fun ride. And then I just decided, when you're someone like me who likes challenges and likes to do new things and things are now going really well, you get a little antsy. So it was time to move on.

Mark Zandi:                       Move on.

Teresa Bazemore:           Yeah.

Mark Zandi:                       And then was next stop then, CEO of the San Francisco Federal Home Loan Bank.

Teresa Bazemore:           Not right away. So I actually started joining corporate boards, and the first board I joined though was the Federal Home Loan Bank of Pittsburgh. And that's how I got really to understand the Federal Home Loan bank system and how it worked. And then I also joined the board of a mortgage REIT, Chimera, publicly traded out in New York. I have to say, I understand how important liquidity is in part because of being there and at a mortgage read in the middle of the pandemic when the market sort of seized at the very beginning. And then I joined the funds boards of T. Rowe Price, and I still serve on those, I just finished a stint as audit committee chair.

Mark Zandi:                       Oh, fun.

Teresa Bazemore:           And then we moved to California. So we moved to LA, it'll be five years at the end of this year. I had to give up the Pittsburgh board because I had a residency requirement, and I started on another board, which is an industrial REIT. So it's kind of nice because I have sort of a good array of things that I get to learn from in terms of what I do. And then, so I joined this opportunity came up at the Federal Home Loan Bank of San Francisco after I had been in LA for a bit.

Mark Zandi:                       Well, and the news is that now you've been there for a few years and you're going to retire from the San Francisco Fed. I guess you're off to the next thing.

Teresa Bazemore:           Well, it's funny, it's a huge lift. And when you're on the San Francisco side of things, so much is focused on, in DC. So I'm finding myself traveling a lot to the East Coast. And also a lot of people don't realize that the 11 federal home loan banks, we raise our money through the debt markets through another entity called the Office of Finance. We all as CEOs sit on the board of the Office of Finance. So that's like being on another board that meets six times a year in DC or New York. And so I think, I just thought it was time.

                                                The board offered me another three year contract. I was willing to stay another year beyond my current contract, but with the report coming out from the agency from the FHFA, and we knew there were going to be a lot of recommendations coming out, and I've been very involved in the systems involvement with those discussions. The board was concerned that this is a long-term effort and it needed someone who was willing to oversee that effort going forward. And so the decision was made that we would let my contract end on its own terms, and they're starting to search for the next person.

Mark Zandi:                       Well, I can't wait to see where you go next. It'll be really cool to see that. Now you said a lot-

Teresa Bazemore:           Not a full-time job.

Mark Zandi:                       It sounds like you've got three or four full-time jobs, I'm just saying. But there's a lot to kind of unpack there with regard to the federal home loan banks because you and I and Cris and Marisa know the FHLBs, but most people don't. They've been around 100 years, and we need to unpack that and talk about what you alluded to earlier, the FHFA, the regulator of the federal home loan banks just this week, I think, came out with a report detailing some potential reforms that are going to play out over a period of time. So we'll come back to that.

                                                But before we go there, I want to kind of mind your expertise in the housing market and the housing finance system. Because a lot of the listeners are really focused on what's going on in the economy, and obviously the housing market is kind of front and center because it's the most interest rate sensitive sector of the economy. And it's at this point in time, taking it on the chin, right? 8%, 30-year fixed rate mortgage, nothing's affordable, home sales have collapsed. So maybe you can just riff a little bit and give me your sense of what's going on in the market and where you think we're headed here.

Teresa Bazemore:           Yeah. Well, I'm concerned about the housing market, at least in the near term. I don't know if that's the next two, three years or what that looks like for a number of reasons, some of which you've alluded to. But probably the number one issue is the lack of affordable housing stock. And I don't think there's an easy solution to that one right now.

                                                If you look at it, the number of households in the country is growing, so we're needing even to build more affordable housing stock, and that's at the same time that we already have a deficit of housing stock that needs to be filled. A large percentage of our, as you know of homeowners, are at interest rates that are at 4% or less. You could talk to people all the time who have a 2.5% Or 3%.

Mark Zandi:                       It seems like everyone, I'm just saying, everyone I talk to has a 2.5% mortgage. Have you noticed that?

Teresa Bazemore:           Yes. But it's true, almost everyone in the US who's a homeowner has a mortgage that's under 4%, right? So the reality is that it creates a disincentive for people to move on and move up to the next house in the normal course that you would expect. Instead, they stay where they are, they do remodeling. Maybe that's good for Home Depot and Lowe's, but I mean, it is an issue in terms of that move up quality of housing, that part of the housing stock now being available to new home buyers.

                                                And so I think that's an issue. Also, older Americans are aging in place, so they're also not going and living somewhere else in other communities or maybe with their children. And so all of those factors, I think will keep home prices elevated. They might moderate, they may not go up in the ways that we've seen over the last few years, but I think those factors are going to sort of keep the market more expensive, if you will, rather than seeing any kind of major price drop. But that's also affecting the banks and credit unions, right? Because they've essentially, they're holding a lot of this mortgage credit, whether they're holding individual loans in their portfolios, or they're buying MBS, CMBS or all of the above-

Mark Zandi:                       Mortgage securities-

Teresa Bazemore:           Right, mortgage-backed securities, they're holding those in their portfolios, and a lot of that is fixed rate. It's at those low percentages, but yet interest rates have gone up substantially and their customers are looking for higher returns on their deposits. So there's a disconnect there. And so they have to be able to finance what's in their books if they don't want to have to sell it at a loss, but also try to pay higher rates.

                                                Because otherwise, what we've seen over the last year to really almost two years now, is we've seen a lot of that money go into money market funds as people realize that they can get higher rates elsewhere. And so that's having an effect in terms of deposit runoff, which really started in 2022, started to see that deposit runoff. And so it's really concerning from the point of view of now banks, credit unions have to really think about how much capital do they keep, how much liquidity do they keep on their books?

                                                And that is, I think we're starting to see a contraction of credit availability because of that. Where we're seeing it in the single family side, which of course, there's no refis anyway right now, but I think we're still seeing that issue. We're certainly seeing it with construction lending and multifamily where especially some of the regional size banks who have been very active in that space are concerned about needing to have more liquidity available. And so it's a concern for all of those reasons in terms of what we're going to see.

                                                And just as a point on the interest rates. As you look at people being able to purchase homes every time the interest rates go off, I call it sort of a carving off, there's a segment of people who can no longer afford to buy. You've already got elevated home prices. They could buy, maybe they could afford to buy at 5%, but they couldn't afford to buy a 6%, or the people who could still afford to buy at 6% can't afford to buy at six and a half. So each time the rates go up, I think there's a group of people who no longer can afford to buy a home, and that's going to have an effect as well. And how those things all intersect, I think remains to be seen.

Mark Zandi:                       Yeah, that's a downer. So you began-

Teresa Bazemore:           Sorry.

Mark Zandi:                       No, no, I mean that's the reality of the situation. I mean, you began with the affordable housing shortage, and come back to that in a second. You talked about lock-in, meaning people have mortgages that are low. If they want to sell their home, go get another home and get another mortgage, just prohibitively expensive given the jump in rates. And then you talked about the mismatch on the balance sheet of financial institutions, banks, and credit unions. They own all these mortgage securities at low interest rates, and they're now upside down on that, and it's creating all kinds of funding issues, which by the way is where the federal home loan bank can come in and help. But nonetheless, so lots of different things going on. I just want to circle back to the affordable housing shortage for a minute.

                                                And Cris, I know you recently did some work here in trying to size the amount of how significant that shortage is.

Cris deRitis:                        Yes. So we looked at the vacancy rates across the country, examine the current vacancy rate for both homeowner and rental properties, and compare that to the long run average. And based on that gap, reg vacancy rates today are extremely low compared to history. Based on the gap between where they are today and what the average is, we calculated a need of about 1.2 million homes that would be needed to be added to the market instantaneously. This is just accounting for the current market, just to get us back up to kind of that long run level of vacancy. On top of that, as Teresa alluded to, there's ongoing household formation, there are houses that are lost to natural disasters, of course, that also have to be replaced.

                                                So that's kind of the minimum stakes, if you will, in terms of what we would need to fill that housing gap. On top of that...

Mark Zandi:                       Oh, sorry Cris, go ahead.

Cris deRitis:                        Go ahead, go ahead.

Mark Zandi:                       No, I was just going to say I think that even understates the case, right?

Cris deRitis:                        It does, it does.

Mark Zandi:                       Because if you go into the rental market, it feels like to me the high end of the rental market, not the affordable part, the high end, the big towers and big cities across the country, that's where vacancy rates are rising. There's just a lot of supply coming in. And so that market, you could argue maybe even oversupplied, which means that the affordable part of their market, affordable rental, the shortage there is probably well higher than 1.2 million. I mean, if anything, I'd say your 1.2 million is probably a lower bound on... Yeah, okay.

Cris deRitis:                        Yeah, you can see that pretty clearly in the house prices too. With the lower priced homes, the more affordable homes, their house price growth continues to be quite strong. It's the higher end of the market where we are seeing some house price weakness or at least moderation. But it's very competitive still because of the affordability recently, and the real lack of supply for affordable homes that's propping up those prices. So that makes it even worse, right? Not only do you have a higher interest rate if you're looking for a more affordable home, but you're also competing with lots of other borrowers, and that's even pushing up the prices even more.

Mark Zandi:                       Teresa, did you want to say something?

Teresa Bazemore:           No, I was going to say, I think your point is well taken that if you look at some of the large cities where, I mean we are in San Francisco, and businesses have started to rebound. You're starting to see more people than you had in the past, but there's a lot of remote work. You guys are working remotely. And as a result, I think your point about maybe some of the vacancy rate being more elevated in the large urban areas is accurate. So I think that gap is probably maybe a little bit higher. But to your point, Cris, it's a big gap. And that's without taking into account household formation, or to your point, also destruction of housing through climate, disasters, et cetera.

Mark Zandi:                       Yeah, and I also think the other, this might be too much into the weeds, but our listeners like to go into the weeds. So it feels like there's also what I would call pent-up household formation, right? Because households can't form because, where are they going to live? I mean, they can't afford a single family home, they can't be a homeowner, at an 8% fixed mortgage rate, and they can't afford the rent because rents have gone skyward up until now. So they're doubling up, they they're staying with their parents. So I suspect that the shortage is even greater if you considered a normalized level of household formation. Does that resonate too? Do I have that-

Teresa Bazemore:           Yeah, yeah. And I think the way someone described it to me was we sort of have this natural view that you sort of get into a starter apartment, if you will, and you sort of get a little bit more income, you move up. And so there's sort of the rental market, you're moving up in the rental market, and at some point you exit into the ownership market. Most people do, or want to, and then you sort of move up there. And the way our housing market is set up, it's set up for that. So when you get almost a clog in the market somewhere and no one can move up. So even the people who are able to move up may not be able to move up in the places where they are, depending on where those vacancies are. And you kind of then have a situation where the new entrants can't come in and you're right, they're living at home, or they're three or four people sharing an apartment, and those kinds of things.

Mark Zandi:                       I guess the one, if I'm looking for a bright spot, and Cris knows, I always look for the bright spot, it's in terms of mortgage credit quality. I mean, even though we've got all this stuff going on in the housing market and the economy delinquency rates, certainly default rates of foreclosures on mortgages remains exceptionally low. It's starting to push up a little bit, just starting to normalize. I think mostly in FHA, those are kind of loans to lower income, less credit-worthy borrowers. We're starting to see some credit problems, but generally speaking, I think the delinquency rates are still pretty low, and it doesn't feel like we're going to have a credit problem because there's so much built up equity in these homes.

Teresa Bazemore:           And I think Mark, you and I both saw a lot of that, right? Between being in the MI sector where what you're selling is protection on credit risk. But that's right. I mean, even though you're seeing it tick up a little bit, it's been immense... I mean very low in terms of the mortgage default rate, and I think it's still below what you would even think of as normalized. So I think that a lot of that is some of the regulatory changes that were made, and Dodd-Frank, some of the requirements that have been put in place, I've always felt that that created some structural changes.

                                                And memories are long when you go through the kind of crisis that we went through in '08 and forward, no one's looking to embrace anything. And I think you don't want to put people in mortgages that are unsustainable. And I think we do have to guard against any movement back into something like that. I mean, my view has been, well, I really want to see more people and better diversity in terms of people of color being able to get into home ownership. I also want to make sure that those loans are sustainable going forward. I think it's the worst when someone takes their life savings, puts it into a home, and then they lose the home. It would've been better off without having bought the home in the first place.

                                                But I don't think we're even near anything like that. I think that some of the structural changes through the regulatory process in particular and the statutory process have helped sort of reform how this is all being done. And certainly Fannie and Freddie are instrumental in that regard.

Mark Zandi:                       And I guess that's one reason why, in terms of house prices, we probably won't see large sharp declines in prices because, unless you have a lot of distressed sales at distressed prices, that you generally don't see that. But I suspect we'll see, we have to see some weakening in price as people... Life happens, right. Eventually the home they're in doesn't suit their life. I mean, kids and children and divorce and death and job change, they're going to have to move. And once they start to move, if mortgage rates haven't come all the way back in, even with an economy that's generating jobs, it does feel like for that to happen, we got to see some kind of price weakness. That's my sense of it.

Teresa Bazemore:           There's got to be a lot of that, I think.

Mark Zandi:                       A lot of that-

Teresa Bazemore:           Yeah, before you're going to see that. Because if it's just about, hey, I need a new bedroom, maybe you add on to your existing home. Now you've got more flexibility in terms of adding accessory dwelling units on your property, there's been a lot of focus on that in California, as an example. So I think that always is there.

                                                Mark, I don't know that that gets you there quickly because as Cris was alluding to, you still have multiple offers on some of these affordable, more affordable homes. So as long as you've got 3, 4, 5 or more people bidding against each other, it's going to keep prices somewhat elevated, even when those things are happening that free up some more units in that area.

Mark Zandi:                       So you're arguing that more likely prices just stay flat and let things catch up. Mortgage rates come in, incomes catch up, as opposed to house prices coming down because you have this-

Teresa Bazemore:           Yeah.

Mark Zandi:                       Yeah, okay.

Teresa Bazemore:           I mean, maybe house prices, as Cris said on the upper end come down a bit, but I think, and I wouldn't necessarily say they stay flat, maybe it's just a much smaller incremental increase. And I think it's going to vary a lot by market too, right?

Mark Zandi:                       Yeah, for sure. Well, this is a good time to move over and talk about the federal home loan bank system. So I'm curious, so you go out to dinner with folks or go to a cocktail party and someone says, "Well, what do you do?" And you say, "I'm the CEO of the San Francisco Federal Home Loan Bank." You just get these blank... Federal, what is that? What is the federal home-

Teresa Bazemore:           Well, sometimes they ask me, "What about getting a mortgage?" And I have to-

Mark Zandi:                       Oh, is that what they say? Okay. "Can you help me with that mortgage, please?"

Teresa Bazemore:           Exactly. The way I think about it is, so the federal... You referenced the almost 100 year history. The federal home loan banks were created in 1932. There are 11 of us. And for the San Francisco bank, we cover California, Nevada, and Arizona. And actually, if you think about, there's some real brilliance in terms of how they created this, because it was really to provide liquidity.

Mark Zandi:                       They being US lawmakers?

Teresa Bazemore:           Meaning Congress. Meaning Congress.

Mark Zandi:                       Okay, so 100 years ago, the Congress did something right?

Teresa Bazemore:           And if I always reference It's A Wonderful Life, right? If George Bailey had had a membership in the Federal Home Loan Bank-

Mark Zandi:                       There you go.

Teresa Bazemore:           ... he could have just called up, got some money when those folks were doing the run on the bank. Instead of saying, oh, your money's in that person's house and that person's house. I mean, that's the modern day equivalent of what is happened, we've seen over the last couple of years. So I think, but also the system is able to expand and contract. We have, Congress has changed who can be a member over the years. We now have commercial banks, credit unions, community development financial institutions, and insurance companies have been members from the beginning. They can all borrow from us, and that the primary business is the advanced business. It was the original business, and that was liquidity for our members to sort of finance what they were holding on their balance sheets.

                                                And I think that's another sort of misnomer. We're not a warehouse lender, although some of our members are warehouse lenders. And so indirectly we help them with the funds to lend to, it could be other banks, but it could also be independent mortgage banks that they're lending to. But we are really helping to finance the long-term holding in portfolio of mortgage loans and mortgage-backed securities. And so I think of it in that way. Also, generally about 50% of our members are borrowing at any given time. So there's sort of a consistency, if you would.

Mark Zandi:                       I'm sorry, what percent did you say?

Teresa Bazemore:           About 50% at any given time are borrowing. So when you have these stresses in the market, that's when you see kind of everything shoot up, more borrowing at higher levels, but also more members borrowing. So we saw that earlier this year where institutions borrowed more because they were worried about not having enough liquidity on hand when they saw some other banks have runs. But there's almost an accordion effect to the system where we can expand if we need to, we raise our money in the debt markets, and then we can contract again to where the demand is that our members have.

Mark Zandi:                       Yeah, I really like your use of George Bailey in A Wonderful Life. I mean, that's a great example. So in the depths of the Great Depression, depositors were panicked, they were saying, "Give me my money." And the bank had to... Savings and loans of the time had to give the money back, and they're giving the money back, then they can't fund other lending, and they have to call in the loans, they have to call in those mortgages to pay off the depositors. And we got into this kind of self-reinforcing negative cycle down they called the Depression.

                                                And the idea was federal home loan banks established in 1932 in the middle of this, that the savings and loans insurance companies could put those mortgage loans that they had on their balance sheet up as collateral to borrow effectively via the Federal Home Loan bank system, which is backstop by the federal government, so they could borrow it at good rates, and continue to meet depositors' needs, but not call in those loans and not create complete chaos and complete havoc in the housing market. And to this day, that's still the model. And what you're saying is, we don't have great depressions, but we have things happen. We have pandemics, we have the financial crisis, we have what happened back in March in the banking system, and the Federal Home Loan Bank is there to provide that role to help George Bailey get the cash that he needs to be able to keep the bank open, and allowing the economy to move forward. And so it expands when it needs to and it contracts and when the need's not there. That's-

Teresa Bazemore:           Absolutely, and it's really interesting. Because If you go back to 2021, right? Well, actually if you start in late 2020 when the government was putting a lot of stimulus out there because of the pandemic, and individual households were getting a lot of dollars, they were depositing them into their financial institutions, whether they were banks or credit unions, and they were... And so what we saw in 2021 was that the balances of the federal home loan banks that sort of normalized kind of level of balances or a loan advances went down to very low numbers at the end of 2021. If you go back and look at that, that's, what you would see, and it's because if you are a financial institution, the cheapest way to fund yourself is through deposits. You're going to do that before you're going to borrow money.

Mark Zandi:                       The banks were paying nothing. I mean I remember back, it was like if it wasn't zero, it was pretty darn close to zero on the-

Teresa Bazemore:           It was pretty very darn close.

Mark Zandi:                       Yeah.

Teresa Bazemore:           Exactly. And then what we saw in 2022, because I remember we were having conversations about, how long would this really low level last? How long would it take those excess dollars to burn off? And we were thinking two years, three years. We certainly didn't expect to see it happening in 2022, when we were going into 2022. And what we saw instead was a combination of things, but initially part of it was as the economy started opening up, people started spending some of that excess money. They also, as rates started going up, they started moving it elsewhere where they could make more money. But at the same time, when those deposits had come in, the financial institutions do what they normally do. They deploy it, so they lent more. They did more mortgages, they bought more mortgage-backed securities, they bought more treasuries. And so they had these portfolios that were at the rates that were prevalent at the time that they made those investments, but we saw an increase of over 500 basis points in 14 months.

                                                And so those assets end up being underwater. And so you have two things happening. You now need additional funding to keep those assets. That's why we saw the borrowing across the system go up even in 2022. And it was all types of institutions, it was all sizes of institutions. It was, we saw it in not just in the banking space, but in the credit union space as well. And they're member organizations, they still saw some of their members put money in a money market fund where they might get paid 5%. And so that's how this all works.

                                                And so that's why it's really kind of brilliant how this was set up. And that even with all of the changes that have occurred in terms of changes in who can be members over the years, changes in how the market works, the securitization market certainly didn't exist in the 1930s, but it's really about holding those assets. And most of the collateral that we take are in fact some type of mortgage asset, right? They're either whole loans or they're mortgage-backed securities, sometimes multifamily mortgage-backed securities, sometimes some commercial, but mostly resi and multifamily.

Mark Zandi:                       Okay, so let me, now, of course, the federal loan bank system has come under some criticism over the past year or so, lots of different lines of critique. The one that I think resonates with most people is going back to the March banking crisis, the failure of Silicon Valley Bank, SVB and Signature Bank, these two large institutions, I guess SVB was in your world, and Signature was over in New York.

Teresa Bazemore:           Correct.

Mark Zandi:                       And these were large failures that led to a bank run, and it was pretty scary for a while until Federal Reserve stepped in and provided some liquidity support, the bank term funding program. And the regulators stepped in and ensured that the depositors, those at above or below the deposit insurance summit in these institutions, so they quelled the crisis. But nonetheless, and if you go back and look, SVB and Signature were very large users of the Federal Home Loan Bank. They were under pressure, and so they turned to the Federal Home Loan Bank. Because they were getting deposit outflows just like George Bailey. Money was flowing out and they said, "Okay, I'm a member of the Federal Home Loan Bank. Help me out. And here's the collateral. By the way. Here are the mortgages and the mortgage securities and everything else that I need to borrow from you, Federal Home Loan Bank." But they failed, and of course now it's history. So how do you respond to that? What do you think about all that critique?

Teresa Bazemore:           Yeah, so I think there are a few different points. One is that we are not the regulator. And I think that gets confused too, because for many years it was the Federal Home Loan Bank Board or something to that effect, and it was the regulator and the provider of liquidity. And Congress carved that off. I think in FIRREA-

Mark Zandi:                       Yeah, 1990?

Teresa Bazemore:           ... 1989, and now the FHFA is our regulator, but all of the members that are members of the banks are not... We are not their regulator. Now, we have an obligation to credit underwrite our members. There are certain requirements in order to even become a member in addition to the type of organization that you are. And so we underwrite them when they're coming into the system. But even after that, we look at their ratings from their primary regulators, we look at their financials as they report throughout the year, and we establish what the maximum amount they can borrow from us based on all of that underwriting, if you will. And then we also then determine.... And that's what we call that, the financing availability. So think of it as, hey, I'm a bank or a credit union or insurance company. I can borrow say 20% of my assets' size.

                                                And then there's borrowing capacity, which means now I've also pledged enough collateral, that's the collateral that meets the congressional requirements that I can borrow against. Most people don't have, or institutions don't have enough collateral they've posted to get to that financing availability amount. But why this is important is because it's really on-demand liquidity. So some of the critics have said, "Well, you should know what they're going to use the money for before you lend it." The whole structure of the system is built on demand liquidity. So if someone calls in and says, I need a billion dollars, or I need a half a billion dollars, we have already underwritten them. We know that the collateral is there, we've looked at the collateral. As interest rates have gone up, we've actually reviewed and decreased the value of the collateral. So we know whether they can borrow. If we had to underwrite the purpose, it wouldn't be on-demand liquidity anymore, and it would totally change sort of how we can-

Mark Zandi:                       Well, it may not work. I mean, going-

Teresa Bazemore:           And stabilize... Right, I mean, we wouldn't be able to stabilize.

Mark Zandi:                       You go back to George Bailey, the depositors are knocking on the door, you've got to do something like now. You can't go-

Teresa Bazemore:           Exactly.

Mark Zandi:                       Yeah, right.

Teresa Bazemore:           Exactly. So I think that's part of it. And so if you think about it, whether it was Silicon Valley or Signature or the many other institutions that were starting to increase their borrowings, they were increasing their borrowings over the course of 2022 into '23 for some of the reasons that I was talking about a few minutes ago.

                                                And so even two days, I think before the bank run, they were still highly rated banks by any, if you looked at any of the rating agencies, et cetera. The day before the run they announced they were going to have this big loss, we actually immediately started looking at their capacity and whether they should still be able to borrow, et cetera, that they had a run literally the following day. So I think that in the speed of the run, nothing like anything we've seen. I mean, even in the financial crisis, I think one of the best statistics I've heard is that I think WAMU lost about 10% of its deposits over something like three months. And SVB lost 26% of its deposits in a day. And if there weren't a cutoff for getting money out of the bank, it would've just continued because there was a lot of demand that would've come out the next day. Which is why-

Mark Zandi:                       Correct me if I'm wrong, but I think the FDIC shut SVB down in the middle of the day on a Friday-

Teresa Bazemore:           It was a Friday morning-

Mark Zandi:                       They never do that.

Teresa Bazemore:           ... they never do that. I mean, it was about 8:15 west coast time, or when I found out it was about 8:15 in the morning West Coast time when they shut it down. And so I think while I hear what some of the folks are saying, and I think there's certainly things we learned over the course of this year, things like the level of uninsured deposits and some of those things we have to start taking into account as we evaluate the credit worthiness of members and decide what that level of lending, maximum lending amount should be, and continue to refine our credit models based on what we've learned over the course of this year, I think it would be a mistake to not have it be on-demand liquidity the way it is now.

                                                And it's particularly important, and I think you've pointed this out in some of your writing. For small institutions that don't have the access to the capital markets, or in a stress situation, access to some of their normal other sources of liquidity in those circumstances, they really do rely on us for that money. And continuing to have sort of a robust system is important to keeping also the cost of that liquidity as low as we've been able to keep it.

Mark Zandi:                       Well, as you point out, along with my good friend, Jim Parrott, the great housing analyst and a couple of our other colleagues at Moody's, we've written a couple of papers. And I'm a fan of the Federal Home Loan Bank system, so I might be a little bit biased. I'm just going to turn to Cris real quick. Cris, because Cris may not be quite the fan, he may be one of those critics. Would you push back? What would you push back on anything that Teresa just said? Anything that we-

Cris deRitis:                        I would agree certainly that they have provided liquidity and that liquidity is important. I guess at the same time that it comes at, there is moral hazard that's injected in the system by having access to that liquidity on-demand. Having a cheap source of liquidity, I as a bank and institution may not take other steps to guard against or even... I think one key example is how few institutions actually have a direct line into the discount window, right?

Mark Zandi:                       The Fed discount window.

Cris deRitis:                        What's that? The feds-

Mark Zandi:                       The Fed discount window, yeah.

Cris deRitis:                        The FHLBs are the next-to-last lender of last resort. The lender of last resort remains the Fed. You have smaller institutions that really are just geared into the FHLB system, and if they needed to actually access the discount window, they haven't tested that system, they don't have the guardrails. I think that just underscores some of the moral hazard that exists there. So I agree that they play a role, but I would push back a bit in terms of, there are these moral hazards that we should be thinking about and certainly looking to reduce in order to make sure that the system continues to serve the need that we've described for it.

Teresa Bazemore:           And Cris, I actually, we wouldn't disagree on that point. I wouldn't necessarily call it moral hazard. I would call it lack of risk management, right? Because if you think about it, it's about having all of the plumbing ready in case you need it. So if you really are, and this was one of the points that was really made in the FHFA report, I think what we saw was someone like Silicon Valley Bank and the run was so dramatic, I'm not so sure it would've mattered, but we were all scrambling to try to help them get set up and get the collateral over to the Fed that evening before they were taken over.

                                                But I think for some of the other institutions, we spent a lot of time over the course of that weekend making sure there were intercreditor agreements set up, and we've continued to do that. So we now have a significant number of members that have those kinds of agreements in place, and that's the focus going forward. But I think of it more as a risk management tool. They should have access and the ability to go to all of those funding sources because I mean, we are really there raising money in the debt markets. We don't have sort of a vault of money sitting, right?

                                                And so if you show up in the way that SVB did at the close of market asking for billions of dollars, there's just no way. Even if we had been comfortable from a credit point of view, there was just fundamentally no way to do that. They really needed to go to the Fed. And so I think your point is well taken, and that's been one of the areas of focus going forward. I think separately, in the case of SVB, one of the things we learned was that the asset liability management wasn't... Now, but that's not something that we normally would be as focused on because we're not the regulator. So we're really more relying on the regulators to look at those things. It raises the question, how far do we have to go in terms of credit underwriting? What more additional things do we have to look at in terms of how institutions are our functioning?

Mark Zandi:                       Let me turn now to the FHFA report. So the FHFA took on board all the criticisms and concerns that people have been expressing, and we haven't tackled all of them. We tackled some of them, but there's many, and it makes sense, right? You've got a 100-year institution, it's got to evolve and change and keep up with what's going on in the mortgage system and the housing finance system and everything else. So it makes sense that it needs to be looked at carefully on a regular basis. And that's what the FHFA, your regulator did produce a report, and lots of interesting moving parts there. I actually, I'm curious... Well, maybe I should, before I tell you my view, I should ask you your view of the report, but there's a few things in there I want to dig into. But maybe I'll just at this point turn it back to you and just what's your general sense of the report?

Teresa Bazemore:           Well, I think we're still trying to digest all of it and figure out sort of... I mean, and if you think about the report, there are about 49 recommendations, I think, altogether.

Mark Zandi:                       Is it 49? I wasn't counting.

Teresa Bazemore:           It's about 49.

Mark Zandi:                       Okay. You're counting.

Teresa Bazemore:           Yeah, yeah. And I think a lot of them are in sort of the affordable housing kind of segment, which we were expecting. I think certainly for our bank and others, we've been doing a lot more. We've increased what we do voluntarily, so that I think there are things that, a lot of those things that we think we can work with, the FHFA and across the system on furthering those things, and some of those we've already done. I think we have to understand how some of these things connect with each other.

                                                So one of the things that I think gets lost, this is not necessarily a comment about the report as much as it is going back to sort of what some of the criticisms have been about, that were sort of inputs, if you will. Is that there's a direct linkage between how much business we do from a liquidity point of view, and what's available to fund affordable housing, right? Because the reality is that whether it... And they recommended a 20%, that AHP, our affordable housing program, the increase Congress put that in place, I think of it as sort of a quid pro quo for not paying taxes.

Mark Zandi:                       So you're at 10-

Teresa Bazemore:           10% today that was put in place in 1990, and the agency has recommended going to 20%.

Mark Zandi:                       And you're saying, well, that's kind of the effective corporate tax rate. That makes sense. That's okay.

Teresa Bazemore:           Yeah. And I think that we are currently at about 15%. We're on our own at our bank, and we don't put that additional 5% into the affordable housing program the way it's currently structured. Instead, we've used it for, we did a middle income down payment assistance program where the down payment assistance... Because in our district we've got a lot of people who, they might be able to buy a home, but they don't have the ability to acquire a down payment. And we're capped at 80% in the HP program of area median income. So we wanted to test that out. The money went, we did $10 million in May, it was all committed by September. So we did 80 to 140 in this first pilot program.

                                                Or we do grants to nonprofits who were doing work in community investment, economic development, financial literacy. We took that number up from 1.5 to 4 million. So there are a lot of different programs where we look at, what are the needs in our particular. We did some around home ownership counseling, but we put all of that together, and that's how we came up with the 5% that we thought would be most impactful in our area.

                                                So what we'd like to see from our bank, and I can't speak for all of the banks, is that if we were to go to 20%, I think we want some of that to be monies that we can use in a discretionary fashion, clearly with oversight to make sure it's being used for affordable housing and community development, but that we can really tailor it to the needs in our communities. We're taking another million dollars and we are investing it in helping to do capacity building for Native American communities, which was another area that was a focus in the report. And CDFIs, I think we probably have the most active borrowing with CDFIs in our district.

Mark Zandi:                       This is just for the listener, it's community development financial institutions.

Teresa Bazemore:           Financial... Correct.

Mark Zandi:                       Nonprofit that invests in underserved communities.

Teresa Bazemore:           Some of them are for-profits, some of-

Mark Zandi:                       Oh, you're right.

Teresa Bazemore:           ... not-for-profit, but more importantly they're non-depository. Because there are CDFIs that are depository institutions, but they have the benefits of FDIC insurance or NCUA insurance if they're a credit union. But I think, so those are a lot of the things I think that there'll be a lot of opportunity to work together on. But we're still trying to sort through everything. The agency, the FHFA themselves has said this is sort of a long road ahead because some of these things, there's sort of a construct of what they have in mind, but a lot more to be sorted through. So rulemaking to come, requests for Congress to act, which in some cases could potentially require rulemaking post congressional action. So I think we'll have to see how all of this plays out over time.

Mark Zandi:                       Yeah, I took a lot of solace in the fact that it sounds like this is going to play out over not next quarter or next year, but over a period of time, which makes total sense to me because I just had this image in my mind of the Federal Home Loan bank as kind of part of the plumbing of the financial system. It's been around for 100 years, and it's not quite clear where the pipes are going and how they all fit. And you start monkeying with it and you say, oh, why is that pipe going over there? Well, it should go over here. You could really cause the system to perform leaks everywhere, not performing very well. So it felt good to me that they're going to take their time here, because you got to really think through what you're going to do.

                                                In your response to me about what did you think this kind of the open-ended question, what did you think of the report? You focused on the affordable housing side, and of course one of the key missions of federal home loan bank system is to promote housing and affordable housing. And that's what you're focused on, and it sounds like you feel that all feels pretty good to you. There's some discussion and got to figure out what works best, but certainly the intent here is in the right direction.

                                                The other aspect of the federal home loan banks, which we've talked about, but just to make it explicit, is financial stability. Providing a source of funding to member institutions, banks, insurance companies, CDFIs, when the going gets tough, when those depositors are knocking on George Bailey's door and providing that stability to the system. And as you said, the money can come in when it's needed and go out when it's not needed.

                                                There I'm a little bit more, I don't know if the word's uncomfortable, I'm just a little not sure because it goes to the conversation in the report around, well, the bank should be relying more heavily on the Federal Reserve Board through their discount window. The discount window is the place where banks go if they get into real trouble and they need cash to manage their way through, and not to the federal or home loan bank system. And I'm confused as to how do you draw that line? Where exactly should the Federal Home Loan Bank be in relation to the Federal Reserve? Is my-

Teresa Bazemore:           No, I think you've hit a really important point because there's not really a bright line, right, to this in terms of when someone is really in trouble enough that they need to go over. And obviously we're talking to the primary regulators, and I think that's going to be part of the discussion as to trying to suss out when that point comes. And it may not be the same because the circumstances for a particular institution are going to be different. And I think largely the thought is that we want the institutions to feel like we're still going to be there the way we've always been there. But I think it also gets to this point that we were talking about where there may become a point where the money they need is at a time or at a magnitude, particularly for very large institutions, where they need to go to the Fed, just because of how we raise our money.

                                                What I think we should have to be cautious about in part too is, and you've talked about the federal bank backing, it's really an implied guarantee. So the reality is we go into the market, and the value of that implied guarantee is what we could get in terms of execution in the market if we didn't have it versus having it, and then we pass most of that on to our members. And so if as some commentators have said, "Hey, that should maybe go to the Fed," then you're putting it all on the federal taxpayer, right? I mean, it's not on the federal taxpayer when we have it. It's on the bond holders, so to speak, to the system. And what a lot of people don't realize is that in addition to having kind of more, we are always over-collateralized, for one.

                                                Number two, we have the member capital that they have to put in. We have retained earnings which have, it's actually a chart in the report that the FHFA put out, the retained earnings of the system have gone up tremendously over the last several years. And then you have the bond holders have the joint and several liability of all 11 banks. So before you'd even get to the implied guarantee, but there could be times where there's such a demand or so much need that the Fed needs to step in. I know, at least for me personally as a taxpayer, I don't want to see a lot of that going over there before it has to.

                                                But that's a, I think very distinct difference in terms of how you think about this, that we would do what we normally do, but there could be points in time. And I think to Cris's point, it is important for institutions to have the plumbing or set up with the Fed if that were ever to happen. And hopefully it's a rarity. I mean, I think about earlier this year, yes, we had three institutions that were ostensibly closed down by the regulators, but at the same time, we had a lot of institutions that were stabilized because of what we were able to do. And we raised more money than we've ever raised as a system in the debt markets to do that. And so no one really talks about that, and how many institutions may have been stake-

Mark Zandi:                       No, no, no, Teresa.

Teresa Bazemore:           Right?

Mark Zandi:                       Jim and I-

Teresa Bazemore:           You did.

Mark Zandi:                       We did, did you see the study we did?

Teresa Bazemore:           Yes, you did.

Mark Zandi:                       We showed that the Federal Home Loan Bank reduces the probability of bank failure, particularly among, as you pointed out earlier, small banks. Because small banks don't have multiple funding sources that if they don't have the deposits, if the depositors are knocking on the door, it's not like they can go to the bond market easily and raise cash or go to the big guys and say, "Help fund me." They go to the Federal Home Loan Bank. So I think there is, so we did do that. And you know what surprised me?

Teresa Bazemore:           You did. And it was a great paper, by the way.

Mark Zandi:                       Well-

Teresa Bazemore:           I'm biased-

Mark Zandi:                       Thank you.

Teresa Bazemore:           But yes, I thought it really hit on that point, and I think that's really important when you're thinking about this whole issue of the mission. And then to the extent that the mission can be as robust as possible in terms of, one of the thoughts here, I think in the report is about this concept of, is there a way for us to do things on the liquidity side that would encourage members to participate more in doing affordable housing, in funding affordable housing, et cetera. And I think that remains to be seen too.

Mark Zandi:                       Can I just make that explicit?

Teresa Bazemore:           Yeah.

Mark Zandi:                       So then, I think if I articulate this correctly, the proposal is, to be a member, you have to show that you make mortgage loans and you have mortgage assets, securities, you're helping the mortgage market, but it's not a criteria that's in place all the time. So you just get in and then you're off and running. You've got to post collateral that's mortgage-related to get the advance, but it's not a requirement for membership. The proposal here is that you have to have, I think, was it 10% of your-

Teresa Bazemore:           10%, and that's actually not what I was referring to. I was-

Mark Zandi:                       Oh, it's not? Okay.

Teresa Bazemore:           No, I was referring more to the concept of discounted advances.

Mark Zandi:                       Oh, I see.

Teresa Bazemore:           Ways that we could, where they would take those dollars and use them for investing, say in construction of affordable multifamily housing or those kinds of things. The 10% I think is a separate test because right now there's not an ongoing test for membership. There's been some analysis that probably wouldn't affect a lot of the banks and credit unions. Some, but most of the banks and credit unions would hold more than 10%. I think it's the insurance companies that are members where it could have a substantial-

Mark Zandi:                       I think they're exempt though. In the report, they didn't exempt the insurance companies? I thought they did.

Teresa Bazemore:           I don't think-

Mark Zandi:                       They didn't? Okay.

Teresa Bazemore:           ... so, no. I think some of the analysts have sort of assumed that they-

Mark Zandi:                       That they would. Oh, that's what it is.

Teresa Bazemore:           Right, but I don't think they're exempt, and I think many of them are not at that percentage. So that would be essentially a group of members... And I think have, we don't have as many insurance members in our bank, just not as many insurance companies that are headquartered in our district. But I know that they are a stabilizing effect for the system as a whole because they tend to be relatively steady. And also you have to look at the insurance companies because they're investing in say, RNBS, et cetera. You've got a large insurance company, 4%, 5% could be a whole lot of investment. So I mean, I think all of that has to be thought through going forward, because it could have a substantial effect on certain segments, and I don't know whether the CDFIs would be exempt.

                                                So at one point we're talking about how can we do more for CDFIs? Some of the CDFIs are small business lenders. And we've been looking at whether or not there are ways for us to do more for them, but they're not necessarily invested heavily in the mortgage business, but they are supporting communities in economic development. So if you think about this in a slightly broader way, we talk about doing things that make for more vibrant communities. Much of that's housing, but some of it's also supporting other aspects of economic development.

Mark Zandi:                       Sure. Well, we're running out of time. I did just quickly want to go back to the Fed. Where's that line between what the Federal Home Loan Bank does and the Federal Reserve? And the Federal Reserve at this point, when we say that, we're talking about, again, that discount window. But that feels so inadequate to me unless the reforms to the discount window, because the discount window, banks don't want to go there because as soon as they do, they're in deep trouble. Everyone knows they're in deep trouble, and it's just going to become self-reinforcing. More people are going to knock on the door and say, "Give me my deposit. I'm out of here, because you're at the discount window." The other thing is, correct me if I'm wrong, it's short-term money. I mean, I think primary credit's like three months.

Teresa Bazemore:           It's 90 days.

Mark Zandi:                       90 days.

Teresa Bazemore:           That's a huge issue, I think, because one of the things, you can borrow from us for much longer periods. And I think we've seen an expansion of the terms of our advances. So one year, two year, five year, and even some of the folks who are investing in multifamily want to go longer than that because they want more of a match between the advance and the funding they're doing for some of the multifamily development that they're funding. So you have the ability to have different terms for a length of term for your advance and ladder them, and really structure how your asset liability management is working. And the Fed is really a 90 day, which is really why I think it's perceived to be more of a short-term backstop in a troubled situation. So we really do function differently, and that's a huge difference that you've pointed out.

Mark Zandi:                       Yeah. Well, I've completely monopolized you. I haven't let Marisa say one word. I gave Cris like three minutes, but maybe before we... That's because this is very complicated. I'm sure listeners are like, what's exactly going on? I can't quite get it entirely. So we'll come back and revisit. But I think this is really, really important, because it goes to something even more broad, and that is what's happening in the financial system more broadly. Not only banking system, but in the non-bank part of the system. And there's lots of vulnerabilities that I think are building up, and we need to, I think, really think through what the kinds of changes we need to put in place to make the system more stable going forward. But I'm going to get off the soapbox. Marisa, Cris, anything else you wanted to ask Teresa about or push on before we call it quits? I know this is really unfair for me to do, but I'm going to do it anyway. So maybe I'll turn to you Marisa first and ask if there's anything you wanted to push back on or ask for greater clarity.

Marisa DiNatale:              No, this was great, I learned a lot. Can I go back to just some fundamental questions about the housing market and the outlook, kind of bringing it back to what we were talking about at the top of the podcast, talking about the un-affordability, the lack of supply. And Cris, you could jump in here too because it goes to your study on the vacancy rates. So we know we have a million units of multifamily housing in the pipeline that's ready to be built or permitted. How does that factor, how do you think that factors into the supply issues? And do we know what kind of housing that is? Is it sort of this top end of the market sort of housing, and how does that factor into the supply in the housing market?

Teresa Bazemore:           So what we've seen, we fund a lot of housing projects that are really for people who are 80% or below of the area median income. I think a lot of what's in the pipeline, and I don't know the specifics about how that all breaks out, has tended to be in the more middle to upper end of the spectrum. And part of the reason is because the cost of building is so expensive. And in fact, we just did some housing summits. We put out a report recently called Closing the Equity Gap. But part of it is just to put a shovel in the ground is incredibly expensive. So it's the land acquisition, it's the permitting. One of the discussions is around, can we get some of the municipalities to sort of decrease the cost?

Marisa DiNatale:              [inaudible 01:20:39], yeah.

Teresa Bazemore:           And if you look at, so we are typically the last money in. So if you look at some of the projects, and they can be for people under 80%, some of them are to fund projects for people who are homeless, homeless veterans, et cetera. But there are often many different funding sources. So it's also much more difficult to fund these projects.

                                                In fact, there was a lot of concern that Senator Cortez Masto had because not as many projects were being funded in Nevada. We actually funded the Nevada Housing Coalition so that they could help educate developers on how to access all the funds that they needed from these multiple sources to try to increase the amount of affordable housing development in Nevada. Because often there's 8, 10 sources of funding. It takes years sometimes to amass all of these funding sources. And it's another important piece around the federal home loan banks, because some of our larger members are the ones who have the capacity to sponsor these projects. There has to be a sponsor. Ironically, SVB had 16 of these that we had to find new sponsors for. So I think to your question, that's part of the issue is, how do we reduce the cost of doing this? Certainly the pandemic didn't help. Material costs went up substantially, and we need more people going into the building traits. Another area that we didn't sort of touch on, but is another issue.

Mark Zandi:                       Cris? Oh gosh, there's so many. Yeah, there's so much.

Cris deRitis:                        Questions and topics-

Mark Zandi:                       We'll have to have Teresa back in retirement.

Cris deRitis:                        I guess I'll ask a very quick question then. Last one. Are federal home loan banks systemically important financial institutions or not?

Teresa Bazemore:           I think they are, and I think every time there's been a stress, we've sort of proven to be. So I think that's important.

Cris deRitis:                        So they should be under the auspices of the Fed?

Teresa Bazemore:           Well, we already have a federal regulator, so I mean... I am not going to go there, but I mean we already have a federal regulator, so.

Cris deRitis:                        Okay.

Marisa DiNatale:              You want them doing stress tests, Cris?

Mark Zandi:                       Well, they do-

Cris deRitis:                        They do do stress tests.

Teresa Bazemore:           We get reviewed every year, by FHFA.

Mark Zandi:                       I think Cris is alluding, if you're labeled systemically important financial institution, then you're-

Teresa Bazemore:           I get it.

Mark Zandi:                       You're under the fed's auspices, and a whole different ballgame. I don't think the FHFA is going to allow that to happen somehow, some way. Anyway, Teresa, it was fantastic to have you on. The federal loan bank system's going to definitely miss your voice, so it's going to be tough void to fill, but you're great, and I really appreciate you coming on Inside Economics, so thank you for doing that.

Teresa Bazemore:           Absolutely. I enjoyed it, and I'm happy to join you at another time. That'd be helpful.

Mark Zandi:                       Well, with that dear listener, we will talk to you next week. Take care now.