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Balancing Risk vs. Reward

Laurel Davis, VP for Credit Risk Transfer, Fannie Mae

Laurel Davis, VP for Credit Risk Transfer, Fannie Mae

Laurel Davis is Fannie Mae’s VP for Credit Risk Transfer, reporting to the EVP of Single-Family Underwriting, Pricing, and Capital Markets. She is responsible for developing and executing strategies to transfer credit risk associated with Fannie Mae’s single-family guaranty business to the capital markets and private investors. This includes directing Fannie Mae’s Connecticut Avenue Securities (CAS) program. Prior to her present appointment in 2011, Davis was Fannie Mae’s VP for the Single-Family Investor Channel where she led a team responsible for sourcing, pricing, trading, and executing bulk mortgage transactions from customers.

M // What are the biggest challenges you face in your role? 

DAVIS // I spend a lot of time working with Fannie Mae’s investors and looking for ways to continue to expand our investor base.  Building and promoting liquidity in the market is one of our most important goals as a company, and our investors are critical to this mission.

A challenge that I face every day is ensuring that we are serving our investor partners by providing them with ongoing information and a high degree of transparency. One important aspect of this is making sure that we are bringing investors along on our journey as we seek to transform the mortgage industry.

As Fannie Mae drives innovation in the industry through tools like Collateral Underwriter (CU) and Day 1 Certainty, we need to make sure that we are not only communicating the value of these tools to help our lender partners simplify their business, but that we are also helping investors understand how these tools improve loan quality and reduce risk.

M // In what ways have you seen servicers use new technology to streamline processes?

DAVIS // We’re tremendously proud of the power that Servicing Management Default Underwriter (SMDU) has brought to servicers. SMDU simplifies the eligibility determination for all Fannie Mae loss mitigation programs so servicers can reduce cycle times, costs, and uncertainty in loss mitigation.

As a result, servicers are able to provide more efficient and effective workout solutions to borrowers. Working with Fannie Mae’s credit investors, I often spend time discussing Fannie Mae’s loss mitigation solutions, and the role that SMDU plays in helping servicers work with borrowers.

Investors immediately understand the value of SMDU in helping to reduce credit losses by bringing timely, consistent, and effective solutions to our servicer partners.

M // What will the mortgage industry look like 10 years from now?

DAVIS // I believe we are on the cusp of a dramatic transformation of the mortgage industry as we begin the transition to data over documents. Today, the mortgage origination process is still way too paper intensive, complex, manual, and time consuming. As a company, our future vision is driven by a focus on data–reducing paper by connecting directly to data providers for validation, and making the mortgage process more automated, efficient, and faster.

Our data-over-documents approach is aimed at streamlining processes, improving loan manufacturing quality, and creating certainty for our customers. Because of our ability today to access tremendous amounts of source data, we can help lenders streamline their business in ways that are very different than the types of streamlined approaches we saw back in the mid-2000s.

Back then, streamlining often meant increasing risk by reducing verification or waiving documentation altogether. Today, we are able to streamline processes in ways that reduce risk by going directly to source data for verification. This saves time for our lenders and their borrowers, and it also helps to produce better quality loans for our investors.

M // Is there an obstacle in your career that you have overcome that has led you to the position you are in now?

DAVIS // I can’t pinpoint a specific obstacle, but when I look back at when I started in the mortgage business, I think at that time there was much less of a commitment to diversity than we see today. Companies in our industry are starting to understand that they need to have a diverse and inclusive workforce to best serve the diverse communities that their customers represent.

As leaders, it’s important for us to foster a diverse pipeline of talent to ensure we are attracting the best and brightest into our business. That’s one of the reasons I am so proud to work at Fannie Mae, where diversity and inclusion have long been a fundamental part of who we are as a company.

M // Is there a project you’ve worked on in the past that you are most proud of? 

DAVIS //  The accomplishment that I’m most proud of in my career is the opportunity to be a part of Fannie Mae’s ongoing transformation to become America’s most valued housing partner. We have fundamentally changed the way we do business in ways that make Fannie Mae and housing finance safer and stronger.

Over the past several years I’ve had the privilege of leading one particular aspect of this transformation, the creation of a new business model where Fannie Mae is able to share our credit risk with other market participants.

Fannie Mae’s central role in the U.S. mortgage market is to provide liquidity to enable lenders to make loans to homeowners in all markets and all economic cycles. We do this through our $2.8 trillion guaranteed MBS program.

In the past, this meant that we kept all of the credit risk associated with our guarantee. After the housing crisis, we knew that we needed to develop a more flexible business model where we could share some of this risk with investors. However, this market literally didn’t exist, which meant that in order to fulfill our goal, we had to create an entirely new market from scratch.

When we rolled out our Connecticut Avenue Securities (CAS) program in 2013, we faced the challenge of building an entirely new market sector. This meant developing a program that would achieve Fannie Mae’s objectives, satisfy myriad regulatory requirements, and most importantly, appeal to a broad and deep investor base.

We’re now in our fourth year of the CAS program and it’s been a resounding success.  We’ve issued over $27 billion in securities to investors around the globe.

Across all our credit risk transfer programs, we’ve shared risk on approximately $1.2 trillion in loans. We see strong liquidity and active daily markets in the CAS program, and I was thrilled this year when we won a number of notable awards. This program truly has become the benchmark for U.S. mortgage credit.

About Author: Nicole Casperson

Nicole Casperson is the Associate Editor of DS News and MReport. She graduated from Texas Tech University where she received her M.A. in Mass Communications and her B.A. in Journalism. Casperson previously worked as a graduate teaching instructor at Texas Tech's College of Media and Communications. To contact Casperson, e-mail: [email protected].

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