Episode 13 – 3/15/2021
Urban Investor: David Brickman’s Housing Journey
Former Freddie Mac CEO David Brickman discusses his career at the nation’s second-largest purchaser of home loans and his new role with Meridian Capital Group.
Kirk Willison: [00:00:06] From his earliest days, David Brickman has been mesmerized by the pulse of cities. Growing up in an apartment in New York City, he often spent weekends with his schoolmates riding the subway from borough to borough exploring all the city had to offer, that passion from urban life has never waned. Geographically, Brickman’s life aligns along Amtrak’s Northeast corridor. He headed South to spend his undergraduate years at the University of Pennsylvania in the heart of Philadelphia. After graduation, it was back to New York City to work at a community nonprofit before ranging North to Boston for graduate school at both Harvard and MIT, where he studied public policy, economics, and real estate. No surprise then that it led David to an expertise in and enthusiasm for multifamily housing, the type of housing most typical to America’s urban core. He kicked off his professional life at the Southern edge of that Amtrak corridor in Washington, DC with six years as a real estate consultant with PriceWaterHouse, then opportunity knocked at Freddie Mac. And in a little over a dozen years, David worked his way from a director in Freddie Mac’s multi-family division to its executive vice president position responsible for running the entire business line. His innovative and visionary leadership transformed the division from a struggling enterprise to a key contributor to the company’s bottom line. In mid 2018, his success is one Brickman attributes to all of Freddie Mac when he was selected by the board to succeed Don Layton as CEO. His tenure in that role, however, was short-lived as David resigned this past January in no small part over frustration that Freddie Mac’s time and conservatorship had no apparent end in sight. He wasn’t jobless long, later that month he was named executive chairman of Meridian Capital, where most of his energies will be back in the multifamily universe. PolicyCast caught up to Brickman at his Washington home. David is great to have you here on the Arch Mortgage Insurance PolicyCast. We spent a lot of our time talking about housing policy here and there’s very few people really in the country, who’s better positioned to be able to talk about that. And now that you’re no longer at Freddie Mac, you can actually talk about housing policy.
David Brickman: [00:02:44] Well, Kirk is a pleasure to be with you. Thanks for having me. And I’m delighted to talk about balancing.
Kirk Willison: [00:02:49] Great, well we’ll get to Freddie Mac in a, in a few moments as well as your new position at, at Meridian capital. But I thought maybe just for starters, why don’t you walk us back to the beginning? Where did you grow up and how did you find your way into the housing industry?
David Brickman: [00:02:58] Certainly it’s a long, somewhat meandering path, you know, some common themes to it. Well, I grew up in New York city actually in lower Manhattan and I guess I will acknowledge my age, I am 55. And so kind of growing up in the seventies, seventies were not a great time for New York City, cities in general. And I used to watch some of the decline that occurred in New York during that period of time, I mean, as a kid. I do remember the headline, you know, Gerald Ford to New York drop dead and the characterization we had at the time. I mean, last one out had New York turn off the lights and, you know, watching that occur then watching the, some of what then, was sort of the Renaissance began occurring. But from that early point actually started becoming interested in urban areas, urban growth, real estate, housing. When I graduated college, I went into economic development and then ultimately into community development, I ran an organization. I was focused on the economic development side of it but my sister organization was involved in housing and I started really focusing then on issues with regard to affordable housing and still in New York City. Issues back then, even the inadequate supply of affordable housing, as well as housing markets, real estate markets, and you know, I’ll fast forward that along way in time was working in a consulting agency focusing on mortgage and housing finance, had begun doing work with Freddie Mac and I remember I would, you know, I don’t want to make it sound like love at first sight but I stepped foot at Freddie Mac. I’d already been pretty familiar with Freddie Mac and people there, but I just saw it as an organization environment that really touched me in a certain way, as far as this is a place like the balance between people who were really thinking deep thoughts about the future in terms of market structure and new techniques and models and ways to look at the housing market combined with a passion for the mission, combined with a business, you know, a hard nose business. And so, while I was consulting for Freddie Mac, someone had kind of thrown out the idea, perhaps he might come on board here and I jumped at the chance and joined Freddie Mac about 21 years ago initially as a senior economist in what was then the financial research area.
Kirk Willison: [00:05:52] Now rumor has it that you are, or were a pretty good poker player, true?
David Brickman: [00:06:00] Yes, so though I, truth being, if I’m a good poker player, I’d say, you know, I played a few times, maybe you can remind me of the rules.
Kirk Willison: [00:06:11] Does it help in business negotiations, that kind of a skill?
David Brickman: [00:06:14] It does! I’m known to frequently use the phrase of my poker playing instincts. I think it is a particularly useful skill.
Kirk Willison: [00:06:26] David, I understand you actually also own some patents for financial products, you want to talk a little bit about those?
David Brickman: [00:06:33] Yes, actually I developed a mortgage back security performance-based PC, a PC for those who don’t know, being though the term Freddie Mac used for a mortgage-backed security presentations certificate. But basically, a mortgage-backed security, that was designed to self-adjust in terms of pricing based on credit conditions. We used it a couple, three times. I think it could have actually been used more broadly but then the crisis hit and we ultimately went a different direction, but something I thought would was useful for then when, particularly the multi-family business was going into areas where issues of, we really didn’t have enough data, enough confidence to be able to understand credit. And obviously what a lot of institutions, Freddie Mac, others included, do when that occurs and they just don’t do much, or they start very slowly. This is for a way for us to actually be involved in the market knowing we really didn’t know yet what to expect and can rely on other institutions to really, who would insist the credit year is great to actually be able to step up and, you know, take part of the risk associated with their confidence in the quality of the credit other than for catastrophic risk. And even in that, I mentioned that a little bit because the seeds of what later became another innovation of mine, of ours, the Acadia securitization program, it kind of came from that same thought process.
Kirk Willison: [00:08:00] You joined the multifamily group at Freddie Mac around the turn of this century, and as I recall, it was a pretty much of a turnaround situation because hadn’t the business, the multi-family side of Freddie Mac, almost gone out of business a bit earlier. And what is it that you came in and saw the opportunity to do differently?
David Brickman: [00:08:20] That’s true. In the late eighties, early nineties. I mean, it was a tough time for multifamily general, for commercial real estate in general. At times the narrative has gone, the underwriting was terrible. It was not good, but in fact, really economic conditions more than anything else in terms of the tax reform act of 86, it kind of under the earlier tax reform act as well as the recession, rolling recessions of the late eighties, and the thrift crisis and all of those sorts of things culminate, in the grand scheme of things that the commercial real estate experience in late eighties, early nineties still ranks as worse than what we saw in the great recession. And that’s true again, in multifamily as well. Nonetheless, Freddie Mac didn’t approach the business in the best way, it was primarily stood up with a single-family mindset of, we lend against the value. We get an appraisal, we lend against value. That’s really not the right way to approach a commercial real estate business, it was shut down in 93. It was brought back up on what we characterize as a life insurance modeling, a real buy and hold model very much looking to sort of cherry pick to play amongst the best assets, best sponsors. And so was able to do a fair amount of business, but really was not the notion, it wasn’t serving the notion of what, again, a GSE is going to be all markets, all segments of the market all the time. And so when I came over, I went over in 99, at the end of 99, so this opportunity to really take it from being kind of a, you know, a life company model, almost think of it as like a savings and loan like model, and really make them a more modern financial efficient, a GSE like model leveraging securitization, leveraging capital markets, thinking about the entire portfolio as opposed to individual kind of asset selection. And really it was, I mean, it’s just a fantastic experience in terms of being able to build up from relatively little base. Analytical capabilities, portfolio management, capabilities, securitization capabilities, capital markets capabilities, and sort of through a lot of those areas.
Kirk Willison: [00:10:37] You mentioned the K deals and then as I understand it is, it’s kind of like the precursor of what we see a lot in the single-family market today, the credit risk transfer. And that’s something that is obviously very important to a company like Arch, but I wonder, could you walk us through the Genesis of that K model.
David Brickman: [00:10:57] Absolutely. Indeed, it was the precursor of CRT, just in terms of timing, I mean, and the realization I had back in 2005 really, I guess four or five, was recognizing if we are going to be in all markets all the time in most any credit condition, we’ve got to have an outlet for our risks. Our intent is to be again in this catastrophic position so that, I mean, yes, in the event that it is a huge crisis maybe we will take losses, but anything less than that should really be other people who are able to price and invest in that risk. I was able to watch the CMBS market, thankfully I had a position heading up capital markets and portfolio management, where I also sat over our very significant CMBS investments. And so got to develop a healthy understanding of that world and that market and so there was a relatively efficient mechanism for selling and distributing the risk associated with commercial real estate asset. The problem in CMBS was the quality of the underwriting, the quality of the processing, the servicing standard, who they did the other parts of the business model, but the actual financial technology that they were using to be able to take loans, to take the risk and divide it up and distribute it was actually reasonably efficient. We saw that opportunity and we were a big buyer of CMBS, which we knew was inferior, there were inferior assets and serious standards, but can we put these things together? Bring them our processing, our underwriting, our relationship management together with the ability to distribute the risk. We actually did our first deal as a pilot pre-crisis, pre conservatorship. And it was with that realization that if we’re going to be as big as we are, we want to dampen down some of the cycles in credit, we want to be able to leverage other people’s capital and did that first deal. It was a big success in 2006, we just realized, unfortunately, we did not have the plumbing to be able to support that business. Having been a buy and hold, not to bore people with the accounting and operations issues, but it’s a very different kind of business processes and model if you are buying things to hold, to mark them, to market, to sell them, to do all of the other things associated with the securitize model. It took us from 2006 to 2008 to actually stand up that plumbing. As everyone could probably guess, a few things happened along the way, such as the crisis, such as conservatorship, but we were nonetheless able to then introduce a mortgage product specifically designed for this execution in 2008, and then do our first modern K deal in 2009. I think it was June of 2009 to be precise.
Kirk Willison: [00:14:08] The multifamily side little lower profile than the single-family side, but it actually contributes a pretty significant profits to the Freddie, at least Freddie Mac, right?
David Brickman: [00:14:19] It does. If I had known, I would have called up the 10 K from yesterday from Freddie Mac in front of me so I give you the exact numbers. I know the income on the multi-family business was an excess of $3 billion. So there is very little risk at this point that is retained by Freddie Mac in the multifamily business.
Kirk Willison: [00:14:39] Post pandemic, we we’ve seen a lot of projections that we’re going to see a K shaped recovery. And it makes me wonder whether we as a country are doing enough to help that large portion, you know, 35, almost 40% of people who are renters and aren’t homeowners. Is there something that the public sector and the private sector should be working with together to really get these renters through some very difficult times?
David Brickman: [00:15:07] That’s a great question and completely agree with the thesis behind it. Yes, I mean I think we have not provided adequate support to renters, and by extension also I’ll even acknowledge landlord. Not somebody you normally think of supporting, but we have to be rational about how the economics work. If a lot of the policy has really just been directed at providing forbearance or relief and no relief it’s worth coming to the landlords, I mean, among other things, worry about what the long-term implications are. Landlords are thinking differently about how they have to think about renters because of this, that could have implications. But more importantly, look, renters have half the income on average, the owners do. There is a greater shortage of affordable rental housing than the other types of housing. Renting is the pathway to home ownership so even as a multi-family guy acknowledging, look home ownership is a virtue. We want to be encouraging that, but if we don’t have adequate rental housing and affordable rental housing, then we impede that sort of a transition process.
Kirk Willison: [00:16:18] So you ran the multifamily business for about a decade and then in 2019, you were named CEO of all of Freddie Mac, as you pointed out, what was that transition like for you?
David Brickman: [00:16:29] I mean, there was the proverbial drinking from a fire hose when I got into that role, learning how complex and intricate the actual machinery of single-family is. There are a few differences that are noteworthy, I mean one is, because of its size, it’s so much more prescribed so a loan structure, right, that does not change, that is highly locked down to do a new loan structure. Multifamily, you’re doing a loan structure every day. So that was something to kind of get used to, documents are locked down and I mean, I think I knew that before, but when you kind of getting documents on a multifamily loan, they’re done differently. How much the TBA market then structure is what you’re able to do. It’s a tremendous positive in terms of providing liquidity and the low cost of capital. But it does mean, again, there’s very much more, there are very many more guardrails in that market as to what can be done. And so the latitude to move things around, right, some people, you know, every loan needs to look the same to enable that huge flow to work. And that, again, changes a little bit the thought process there compared to kind of where I came from in multi-family where at times it almost feels like people are going to great lengths to make every level of difference. And no two loans look the same so that took some adjustment. The other part of it, the number of players is much larger and I don’t know the distribution of them, I mean, from the largest mortgage originators to the smallest, I mean that is a huge difference. I think it is, I mean, there is a greater difference. Multi-family there is a, there is a stand, but it’s nowhere near that sort of, again, where you’ve got a hundred-billion-dollar kind of originators so folks who would do a few loans a year and how you have to think about really very different approaches to those types of types of entities.
Kirk Willison: [00:18:29] During your time as a, the CEO, Freddie, Fannie and FHFA took some pretty important steps toward exiting the GSEs from conservatorship. You hired and FHFA hired investment advisors to guide you about raising capital. You know, and then before you left, there were new capital standards issued by FHFA. I was wondering, how is the process with JP Morgan doing to raise capital or is it making progress with Freddie and with FHFA?
David Brickman: [00:19:07] When we retained JP Morgan back in 2020, it was really with an aspiration that we could go to the market and raise capital, bring new investment into the GSE. And I continue to say, I think while retaining earnings is a very good thing, it’s not a substitute for bringing new capital in. That really will be the big event and I would have loved to have been a part of that. I think that would have been been significant in a few ways. Significant one in that demonstrating that private investors would be willing to part with their money and invest it in the GSE platform. Obviously we can’t prove that they would have at this point but I think we could have, and I think that would have been a big, powerful signal about where the GSE, where the GSEs were last year, where they are today. I also think it would have accelerated the process of recapitalizing and then recapitalizing not thought of in terms of privatization, but really in the same context of de-risking just as I was talking about Arcadia and CRT, having private capital is a way to demonstrate the government isn’t first in line to take any risks, they’re not as again, in a CRT transaction on the assets, but actually doing it in the enterprise. And I think that really would have been a very significant noteworthy accomplishment that would have been a win-win win, a win for the U S government and therefore the taxpayers, a win for Fannie Mae and Freddie Mac, and ultimate actually a win from the industry even if we only started the process and didn’t fully complete it. In fact, I separate at times the notion of getting full privatization as a notion of independence from just beginning the recapitalization process with third-party capital. I think you could do the latter even if you weren’t doing the former. And again, I would have liked to begin that process in 2020, would have liked to have been able to work with our financial advisors, JP Morgan, to have done it. We’ll see what happens over the course of 2021.
Kirk Willison: [00:21:25] That’s feedback loop that you get from CRT investors and from common equity investors really actually works as a governor on companies as to what risks that they’re willing or should be willing to accept.
David Brickman: [00:21:42] Absolutely and I, you can’t say that more emphatically, right, is not only, I even think in some way you could argue that is the bigger benefit you get is having another pair of interested eyes, watching what you’re doing. Not to take anything away from the various lines of oversight and control and regulation that we have today, but there’s no substitute for someone who is investing their money and therefore watching closely what’s going on. We saw that so clearly in the CRT market. I used to joke about, you know, we would have dozens of proctology exams every week with various investors who want to just have the confidence that they are, again, where they’re investing, again, I’m thinking of CRT in this context, there prudently, obviously that is asked, again, a group of assets at a time. I think if we had been able to raise common or even preferred, we would have had that same thing on an enterprise level and of course it works both ways. It would have been a challenge to be able to ensure investors were comfortable, confident that they did have the assurance that things are running well. But then I think it would also have been a source of pride should we have gotten there, as well as a source of comfort to policy makers, regulators, the entire country that were well run if indeed they were, they came away and said, yes, we’re, you know, we’re feeling pretty good about our investments. It really does have a very, I think it would have a very significant effect in that regard should the agencies really be allowed to do it and hope people will see it in that light. Again, not just as privatization for independence, but actually as a safety and soundness ability, both in terms of capital and in terms of having interested parties, keeping a close watch on the enterprise operation enterprises, operations.
Kirk Willison: [00:23:52] Last GSE related question. How do you think the Biden administration is going to approach housing finance reform differently than previous ones?
David Brickman: [00:23:50] Certainly if you listen to the administration, you listened to your president Biden and members of the administration, it seems like they’re going to look very much first at opportunities to provide greater equity in housing, looks like they will be looking at issues in terms of affordability, looking at housing also in the context of infrastructure, what does that mean? You know, first, I think it’s going to be exciting time for the GSEs in that again, for those who don’t know, you know, I mean the folks at the GSEs, they love being part of the solution. They love being kind of part of positive developments that benefit the market benefit from, again, folks who are distressed in certain instances are just are creating pretty pathways to home ownership, again, addressing issues in terms of inadequate housing and so I think that creates some exponential excitement. Obviously, we’ve got lots of really vexing problems out there in terms of affordability, inadequate supply. We’ve got lots of issues in terms of equity, just I mean, the deplorable level of black home ownership and challenges in terms of access to credit and so I think the administration will eventually kind of lean into some of those issues.
Kirk Willison: [00:25:18] David, you recently took a new position as an executive chairman of Meridian Capital. It appears to be a return to the multifamily arena for you. Share a little bit about what your goals are, what your role is going to be at meridian.
David Brickman: [00:25:32] Sure. Thank you. And delighted to be joining Meridian Capital group. I, in fact, I’m also taking a few other jobs. I figured having spent 21 years in one job in an institution that is somewhat narrow, I wanted to spread out a little bit, I mean narrow only in that only being in residential housing and in debt. So, I’ve taken the role of executive chairman at Meridian Capital group, which I’m very excited about. I have simultaneously taken a role as a senior advisor at a private equity firm called Stone Point Capital, who has a fascinating portfolio of investments and just a great portfolio of investments in real estate services and financial technology. I’m very excited to be joining them and the great people they’ve got there who I think really have a great view of the future in terms of the real estate and financial services arena. And then together, they both are in the process of acquiring a lending institution today known as Bearings Multifamily Capital in a joint venture with Bearings. And I will, should that transaction conclude, I will then join that entity as the CEO. And so I’ve got those three things and then equal to all of them, I’m thrilled to be joining the Urban Institute as a non-resident fellow so I can continue to think about policy and even return a little to my more distant roots as an economist and researcher and think about issues of housing, particularly actually about rental housing. But to your point, that is mostly in the commercial real estate world, mostly in the multi-family world, but I think it will give me the ability to look more broadly throughout both residential, commercial, single-family, multi-family, and even growing the services, and even debt and potentially, equity. So, I am excited about that ability to have kind of a broader perspective on things. You know, we are not as big as Freddie Mac by any stretch of the imagination but I’m, so I’m sacrificing the broader latitude for a little less scale.
Kirk Willison: [00:27:34] Do you need larger closet to have all the hats that you’re going to be wearing?
David Brickman: [00:27:37] I do, certainly I’m going to have to have a new a business card holder. I’m having trouble with that, and keeping track of my different emails now, so I’m gonna have to figure that part of it out, but it’s exciting now.
Kirk Willison: [00:27:48] Hey, David, you’ve been great. Thanks for the time, friend.
David Brickman: [00:27:51] Thank you, Kirk.