Can Brendsel (and Freddie) Stay on Roll?

Leland Brendsel loves crunching numbers, and they all add up for the chief executive of Freddie Mac, economically and politically. After enduring public criticism in the late ’90s, he helped defuse a threat to the federal financial support Freddie and Fannie Mae enjoy by brokering a deal with Congress last fall. Now he’s weeks away from closing one of Freddie’s best years ever, with earnings set to top 2000’s by more than 20%.

Quietly proud and ambitious, Mr. Brendsel is determined to sustain the momentum by keeping his political fences mended, conquering new mortgage markets, and ramping up Freddie’s use of technology.

“I feel pressure to get things done — as many things as we can do,” the 59-year old South Dakota native says during an interview in his company’s headquarters in McLean, Va.

Yet there is good reason to question whether the physical-fitness buff, who has led Freddie for 16 years, can deliver a stellar performance in 2002 and beyond. The government-sponsored enterprise has become so big, so fast under Mr. Brendsel, its chairman and chief executive officer, that he’ll be mathematically challenged just matching the annual earnings growth rate — averaging in the mid teens — that has been his standard. Making it more difficult, his market share is about as high as it can go and his primary mortgage markets are softening. Pushing hard outside his main lines of business is fraught with risk, competition is fierce, and Mr. Brendsel, now seen as a peacemaker, will probably anger congressional conservatives seeking to put restrictions on Freddie and its big GSE sister Fannie Mae if they think he’s using his public support to take business away from private enterprise.

“As they attempt to expand their presence in the market, those people who are already there are going to yell and scream,” said Michael McMahon, a mortgage analyst with the San Francisco office of New York-based Sandler O’Neill & Partners.

Investors are already cautious about Freddie’s future. Its stock trades at a relatively modest multiple — 16.21, against 17.72 for financial services companies — for a business that is so highly and consistently profitable. Some analysts attribute this to a conviction that the company will lose altitude.

“If you go out three or four years, their growth rates will slow to the high single-digits — 8% or 9%,” says Chad Yonker, a mortgage finance analyst with Fox-Pitt, Kelton in New York.

Mr. Brendsel has faced similar skepticism before and shown plenty of resourcefulness. Subprime lending and other alternative products are his main business vehicles to pick up any revenue slack of a faltering primary mortgage market. Automated underwriting technology would help on both the cost and sales ends, and he expects his new drives to add another 5 to 10 points to the high-single-digit percentage growth Freddie anticipates getting from its primary markets.

Though it is not guaranteed that his plans will work out, his confidence that they will is understandable. His whole life has been about getting ahead.

Mr. Brendsel grew up on a 320-acre farm outside Sioux Falls, attended classes at a one-room schoolhouse, and rode a pony named Cherokee. His first gambit toward bigger and better things was to drive west 700 miles to Littleton, Colo., with three friends after graduating from high school in 1960 and taking a job at Titan Industries repairing factory equipment.

After his marriage to his high school sweetheart Diane and the birth of the first of their three sons, Mr. Brendsel decided he wanted more for his family than he could make as a repairman, so he went back to school. By day he worked toward a finance degree at the University of Colorado in Denver, and at night he worked the second shift at Titan. His efforts paid off with a fellowship from Northwestern University.

It was 1968, and student protests against the war in Vietnam were escalating, particularly in Chicago during the Democratic National Convention. But Mr. Brendsel never let up on studies to join the activists.

“I was primarily an onlooker,” he says. “I was concentrating on how to survive in grad school.”

He was also working 15 hours a week for his faculty adviser, Don Jacobs, a finance professor and supporting his own family. In 1971 he left Northwestern without completing his doctorate to join the finance faculty at the University of Utah. Five years later he had had enough of academia.

“There was no future,” he recalls. “I couldn’t see doing it for 20 or 30 years.”

He got on the right road with his next stop: Washington. He moved there in 1976 to become an economist for the Farm Credit Administration, the safety-and-soundness regulator for the Farm Credit Banks (government-sponsored enterprises for farm loans). Two years later he went to Des Moines to be the chief economist at the Federal Home Loan Bank, one of the 12 parents of Federal Home Loan Mortgage Corp., as Freddie Mac is formally known. The organization’s president was Northwestern alum Kenneth Thygerson, who had encouraged Mr. Brendsel to take a teaching job with the University of Utah. In 1982 Mr. Thygerson hired him as Freddie’s chief financial officer.

From the start, Mr. Brendsel distinguished himself by his intensity, his hands-on approach to his work, and his facility with numbers, practically an obsession with them. David Andrukonis, Freddie’s senior vice president and chief credit officer of single-family capital deployment, recalls that when they first met Mr. Brendsel immediately started peppering him with questions about his financial research: interest rates, local market conditions, and housing prices. At dinners with Wall Streeters, Mr. Andrukonis says, Mr. Brendsel would routinely “plug dealers and people at Freddie Mac for information for as long as you could hold up, until you [had to] go to bed.”

He became one of the most authoritative voices at Freddie and, given his closeness to Mr. Thygerson, appeared to be in line to take over Mr. Thygerson’s job when he quit in 1985. But Mr. Brendsel was only given the presidency on interim basis.

Mr. Thygerson recalls telling Freddie’s board, “Leland is the person who knows the corporation best,” and that he “would probably keep us out of trouble during an interim period of a month to six months. There were no pressing matters at the company at the time; there was nothing going on that would have necessitated other skills other than to keep the company steady as you go.”

On top of his tenuous hold on the job, he was unable to hire senior executives, which was a serious handicap since other top managers followed Mr. Thygerson out the door. Meanwhile, his chief competitor, Jim Johnson, who ran the much bigger Fannie, was in complete control.

“He made constant comparisons” to Fannie Mae’s size, says Lawrence White, a former member of Freddie’s board. “It was clear that Fannie was the only other game in town according to him, and he was attempting to get closer to Fannie. Salary was always a gnawing issue. Every year he would remind us what other private-sector CEOs of comparable organizations and size were earning, and he was getting paid less.”

But Mr. Brendsel’s status at Freddie eventually changed. In 1987 he became the president and chief executive officer unconditionally and, less than two years later, Freddie went public, as had Fannie before it. Now Mr. Brendsel, who would add the chairman’s title in 1989, could raise capital in the public markets and appoint his own board of directors. Indeed, Freddie and Mr. Brendsel got a completely new look. He moved the company from Washington, D.C., to suburban Virginia and he “started on a campaign to restore myself to some semblance of health,” exercising in gyms built for his family’s new home and for the McLean headquarters, which opened in 1991.

He used 5-K charity runs that Freddie Mac sponsored on Wednesday as motivation. “Most of the officers I bet that I could get my time below 24 minutes. I created a powerful financial incentive to [lose weight] and I won.” He eventually got it to about 22 minutes, and ever since he has been “diligent about working out.”

As its CEO grew stronger in body, his company steadily gained strength. In the early 1990s Mr. Brendsel set about taking advantage of his new public status to shift Freddie’s focus from guaranteeing payments on securitizations to building a retained loan portfolio. The next step was to replace the lenders as underwriters of the loans by developing Loan Prospector. The proprietary technology enabled Freddie to collect a fee from lenders, while controlling risks better and making the entire process more efficient. The company was also able to use Loan Prospector to develop new products and enter new markets, including subprime mortgages.

Freddie Mac tripled in size every three years in the ’90s. In 1997 it was half as big as Fannie Mae, having been one-fifth Fannie’s size in mortgage loans seven years earlier. Earnings in that period went from $400 million to $1.4 billion, and the stock price rose to $45 from $2.50.

Mr. Brendsel’s initiatives helped the bottom line, but there were growing pains, too. In 1997 the Equal Employment Opportunity Commission hit Freddie with the first of two discrimination suits, charging that blacks were being passed over in hirings and promotions. The second suit was in 1998, by a former employee. Both actions were dismissed.

That same year Freddie’s congressional overseers took it to task for adding $340 million in tobacco company bonds to its growing investment portfolio.

“Shouldn’t there be a specific obligation to maintain a culture that’s above reproach?” said Rep. Jim Leach, R-Iowa.

Mr. Brendsel’s highly successful Loan Prospector came under attack around the same time. Large mortgage players that had developed their own automated underwriting systems complained that Freddie was going beyond its charter mission — providing liquidity in the mortgage market — by using Loan Prospector.

Business tensions were mounting, and then, in May 1998, Mr. Brendsel’s youngest son, Peter, died unexpectedly at 27. Mr. Brendsel says he was distracted by the tragedy for a year, but in a way it emboldened him as a businessman.

“My youngest son would not be deterred from doing something because of criticism,” he says.

Mr. Brendsel tried to have Freddie’s charter changed so that the company could sell mortgage insurance. That bid failed, and the mortgage industry, already miffed by the company’s automated underwriting and the federal support that the government-sponsored enterprises enjoyed, started an anti-GSE lobbying group, FM Watch, in 1999.

FM Watch found an ally in early 2000, when Rep. Richard H. Baker, R.-La., introduced a bill to step up regulation of Freddie and Fannie and bar their expansion into other mortgage categories.

Rather than spar openly with his opponents, as Franklin Raines, the charismatic chief executive of Fannie Mae, did, Mr. Brendsel quietly worked on an agreement with Rep. Baker and the Treasury Department. His aim was to demonstrate that the GSEs’ disclosure of their risk-taking precluded irresponsible growth on their part.

In late May, before a meeting with Treasury officials, Mr. Brendsel called on Ed Golding, a senior vice president of financial research at Freddie, and other executives, to come up with a presentation that would show how low those risks were. After the crew put in a week’s work, Mr. Brendsel still wasn’t satisfied and had everyone involved work through Memorial Day weekend to get it right.

But Treasury wasn’t sold on the tuned-up presentation. Seperately, Fannie developed its own ideas, but they didn’t go anywhere.

Mr. Brendsel persisted. In October he and Rep. Baker came to an agreement under which the GSEs’ risk-taking would be made more transparent. Freddie’s stock, which slumped during the standoff, rebounded sharply.

“Where I’ve seen him the best is when we were having all of our troubles with Congress last year,” says John McCoy, a director at Freddie and a former chairman and CEO of Bank One Corp. in Columbus, Ohio. “He is the one who put together the compromise, and brought Fannie along.”

Says Mr. Brendsel: “You don’t need to be high-profile in order to provide that kind of [trust]. You have to be willing to go down there, sit down with them, and explain what you’re doing and provide them with the information they need.”

In dealing with the attention that controversy and growth have brought, Mr. Brendsel, who in June won the National Housing Conference’s Housing Person of the Year Award, has become more visible at Freddie and outside the company’s offices.

“I think he is more focused on the people dynamics of his job,” Mr. Andrukonis says.

That’s good, because he’s going to need all the help he can get to sustain Freddie’s run. He’s working on new products and services, like subprime mortgages, and on reducing the costs of title and mortgage insurance for consumers, but whatever he and his followers do the question will remain the same for Freddie and Fannie.

Bruce Harting, a mortgage finance analyst at Lehman Brothers, offers, “A lot of folks will look at them and say, ‘Gee how much more can they grow?’ ”

Freddie Mac’s prime mortgage market doesn’t support double-digit growth, despite Fannie Mae’s projections that mortgage debt will rise to more than twice the current $5.4 trillion in the coming decade. And its competitors surely will try to block their path as they look for new ways to grow bigger. Where once the battle was over underwriting, subprime lending or title insurance issues could be next.

“I believe this is just the opening round of a long effort here,” says Mike House, FM Watch’s chief lobbyist. “You’re not going to be able to regulate them in a proper way overnight, either. I think the analysts have been too quick to say the political fight is over. We would continue lobbying and educating. There’s a massive education campaign that needs to go on Capitol Hill to fully understand the implications of what’s going on here.”

Yet, by the same token, Mr. Brendsel, a Mr. Inside to the Mr. Outside of his counterpart at Fannie Mae, Mr. Raines, seems as able as he’s ever been of outfoxing his opponents in the political and business spheres. Freddie has been growing at a healthy clip under Mr. Brendsel, and that the company has prospered for so long and has hit a new peak this year doesn’t mean its days as a standout bottom-line performer are over.

“His intellect has continued to enable Freddie to succeed,” says Lewis Ranieri, who worked with Mr. Brendsel for two decades and is the chairman of two financial advisories in Uniondale, N.Y., Ranieri & Co. and Hyperion Partners.

There is even the case to be made that Mr. Brendsel is just now perfecting his craft. A decade ago Freddie was a small player in a modest market. Today it’s a giant — fully 70% Fannie’s size and gaining — in a huge market.

“Freddie Mac is part of his life,” says Laurence Fink, who worked with Mr. Brendsel in the ’80s and is now chairman of Black Rock, Inc., a New York investment firm. “He loves the process of building it into a super financial giant — he thoroughly enjoys making Freddie a dominant financial services company. I don’t think you work that hard unless you love it, to withstand the pressures of the markets, the pressures of the business, the time it takes away from you and your family.”

Mr. Brendsel’s soft-spoken mien belies his grit. He gives no quarter to talk that he is getting stodgy or that his company is.

“We are going to be as aggressive as we can in innovating and constantly trying new things,” he says. “That’s the nature of the company and that’s the nature of me.”