during the previous financial crisis, the proper functioning of mortgage markets is necessary for monetary policy to support the economy. unfortunately, the problems in mortgage finance in this crisis were broader than just the mbs markets. this crisis period has also revealed a number of new — or, in some cases, renewed — vulnerabilities related to lending and loan servicing by nonbank mortgage companies, which i will refer to from here on as mortgage companies. these vulnerabilities were not entirely a surprise to me. when i served as a banker and, subsequently, as the state bank commissioner in kansas, i saw firsthand the increasing share of mortgage companies in mortgage origination and servicing as well as some of the weaknesses in the mortgage company business model. and in my role as a board member with a focus on community banks, i frequently hear about the issues that have caused some regional and community bankers to pull back from originating and servicing mortgages. i view this as a significant problem, because i believe firmly that a healthy financial system must have a place for institutions of many different types and sizes that are able to serve the varying needs of different customers. i will begin today by describing the evolving role of mortgage companies in mortgage markets and the risks to financial stability that activity entails. i will then focus on developments in mortgage markets during the covid - 19 pandemic and discuss how actions by the federal reserve and the other parts of the government helped stabilize financial markets and prevent more severe damage to the economy. finally, i will explain how vulnerabilities associated with mortgage companies could pose risks in the - 3future, and i will review ongoing work across the regulatory agencies to monitor and address these vulnerabilities. i will end by enlisting your help. figuring out how to achieve a balanced mortgage system — one that delivers the best outcomes for consumers while being sufficiently resilient — is a highly complex task that could benefit from the insights of those of you here today. the role of nonbank financial institutions in mortgage markets in the 1980s and 1990s, the share of mortgages originated by mortgage companies increased considerably, as expanded securitization of mortgages allowed mortgage companies, which lack the balance sheet capacity of banks, to compete with banks in the mortgage market. the role of mortgage companies increased further in the 2000s with the growth of the private - label mortgage market, where mbs sponsors are private firms without government support. but the last financial crisis and the prolonged housing slump that followed

over a transition period. ultimately, the institution could be sold in whole or in part. but even in such cases the expectation of owners, managers, and uninsured creditors should be that real and significant losses will be incurred. in my judgment, if policies consistent with these principles are followed, then we will have eliminated much of the moral hazard associated with the federal safety net for depository institutions while simultaneously being able to achieve our goal of preserving financial stability. one way to enhance the ability of market participants to limit risk taking by banks might be to require at least the largest and most complex banks to issue a minimum amount of subordinated debt. many such proposals have surfaced over the last decade, including some from within the federal reserve system. and while i think that it is premature to endorse any one proposal, indeed there are a number of thorny details that would need to be worked out, i am strongly attracted to the basic concept advanced by proponents of subordinated debt. the fundamental notion behind requiring at least some banks to issue traded subordinated debt is to create a set of uninsured bank creditors whose risk preferences are similar to those of bank supervisors. because subordinated debt holders have downside risk, but virtually no upside potential, subordinated debt holders tend to be risk averse in much the same way as is the fdic. thus, when a bank sought to issue subordinated debt the price that investors were willing to pay would bring direct market discipline aimed at controlling excessive risk taking by the bank. a second key objective is to create a set of market instruments that would provide clear, and frequent, signals of the market ’ s evaluation of a bank ’ s financial condition. such signals could act as a deterrent to a bank ’ s tendency to take excessive risk, and could perhaps alert bank supervisors to examine, or otherwise intervene in, a bank more quickly than they otherwise would. changes in the market prices of traded bank subordinated debt, and perhaps other actions by the owners of this debt, have the potential to provide such signals. in this way subordinated debt could be used to bring indirect market discipline on a bank. supervisory discipline must be an effective and dynamic second line of defense while market discipline must be our first line of defense for ensuring financial stability, bank supervision also has an important role to play. the very nature of a systemic disruption, which imposes costs on not only the perpetrators, but also on many and diverse economic agents far removed from the immediate event