The chief executive officer of the government-sponsored enterprise, Freddie Mac, is known as a turn-around guy for good reason. While previously CEO of E*TRADE Financial, Donald Layton recapitalized the firm and left it in good standing.
“Despite facing unprecedented challenges, E*TRADE has evolved under his leadership into a company that is poised to take advantage of new growth opportunities, particularly in its online brokerage business,” said Robert Druskin, the lead independent director of E*TRADE at the time.
“We wish him the best in the future," Druskin added.
That future led Layton to the role of CEO at Freddie Mac. And, he’s turned out to be quite the fit.
I take a personal interest in the operations of Freddie Mac, for good reason. You see, Freddie Mac securitized my mortgage, when I refinanced about a year ago, and after speaking this morning to Layton, I’m convinced my information couldn’t be in better hands.
Layton understands that information technology is vital to the success of large financial firms such as E*TRADE and Freddie Mac.
Recent data breaches at Home Depot and MBIA, pushed privacy issues to the forefront and Layton is taking this risk very seriously.
Indeed, media attention tends to focus most on the credit risk at the GSEs, that is, whether or not taxpayers will be on the hook for any losses. In my opinion, that risk is quite small. For example, Freddie Mac posted a net income of $2.1 billion for the third quarter 2014, marking the twelfth consecutive quarter of positive earnings.
So, I took the unusual step of asking Layton about the operational risks — that is working with the actual mortgages and the day-to-day activities at the firm.
In particular, one quote from his earnings call this morning struck my curiosity. Layton said Freddie Mac was “upgrading critical infrastructure.”
What did that mean and why were these changes so critical?
In fact, there were four key updates that are either finalized or taking place, Layton explained in a one-on-one conversation after the earnings call ended.
1) Updating software
Layton said some of their vendors used more recent software that Freddie’s systems couldn’t support. This has changed and operations are now quicker and smoother.
2) Enhanced cyber-security
Given my mortgage sits with them, this one is my favorite. Under Layton, Freddie enhanced the encryption of personal information. If you work at Freddie, “you can’t stick in a memory stick and start downloading things,” he said. Good to know.
3) Offsite data recovery
Freddie Mac is establishing a data recovery center in Colorado. Not only is your info safe, it’s also somewhere else. This will be helpful in the case of a major catastrophic event compromises Freddie Mac operations in Virginia, or elsewhere.
4) Alternatives to FICO
Freddie Mac measures and analyses credit risk of homeowners on its own, Layton said. However, there are calls for the GSEs to update their use of FICO. Layton said they are, and they may be looking to add other credit score providers. He said they are “studying one or two alternatives to FICO.”
All of these updates are exciting and should help him deliver on his promise to help increase mortgage lending. Once these new developments are established, and the Federal Housing Finance Agency approves, the ability to establish and secure robust homeowner data will allow for more mortgages to be written.
This will allow for both lower down payment mortgages and lesser operational risk.
This also helps hedge the aforementioned credit risk going forward for investors and reduce risk to the taxpayer. Layton’s reputation as a turn-around guy, it seems, is perfectly placed.
