Amy Crews Cutts: Been There, Done That

It seems like Amy Crews Cutts has been here before. She had a front row seat the last time Americans watched their economy melt down. As deputy chief economist at Freddie Mac, she was pretty close to ground zero as the mortgage crisis rolled through the U.S. economy.  And the numbers got really bad.

So, we wonder—does it feel like here we go again?

Back in 2008, the threat seemed more isolated—centered in the mortgage markets. Not floating in the air. And it didn’t put people in the ICU. No nasal swabs were required.

In the run-up to the fall of 2008, Cutts watched as delinquencies began sweeping through zip codes. Whole blocks filled with foreclosure signs. Home prices tanked.  Families lost their homes.

She watched it go down from her perch at Freddie, serving as deputy chief economist from Feb. 2003 to March 2011. And she put in time as a director-principal economist before that.  (Not quite a Freddie lifer, but 13 years is quite a stretch.)

During that time, she saw a very healthy U.S. mortgage market morph into the epicenter of a global economic nightmare. The financial rot spread like a virus, but there were no hospitals involved, no PPE required.

Cutts was in the building when the Treasury Department took away the keys to the front door. For those on the mortgage beat, September 6, 2008 was a mindblower. But for a housing market economist, the soaring numbers documenting the scope of the hurt must have been stunning.

She went on to become chief economist at Equifax, the national consumer credit data company. During her time there—March 2011 to Feb. 2019—she watched consumers slowly rebuild their credit in the aftermath of the Great Recession.

So, I guess the story here is that she’s seen consumer balance sheets get pummeled before. She knows how long it takes for them to bounce back.  She’s seen the housing market get knocked flat on its back. And she’s seen the economy on the ropes before, too.

This whole Covid thing probably does feel a bit like déjà vu all over again.

But just how bad is it this time around? Let’s talk some numbers, shall we?

Surveying the damage

During the Great Recession, the official unemployment rate peaked at 10.2 percent in October 2009, according to the U.S. Bureau of Labor Statistics.

But Covid’s unemployment rate has already pushed well past the highs of the Great Recession. The jobless rate, so far, hit a peak of 14.7 percent in April 2020, “the highest level since the Great Depression,” the Washington Post reported.

In a May 8, 2020 article, the Post noted: “The Labor Department said 20.5 million people abruptly lost their jobs [in April 2020], wiping out a decade of employment gains in a single month.”

But here’s the tricky part, the unemployment rate has quickly backtracked in recent months. It went from 14.7 percent in April; to 13.3 percent in May; to 11.1 percent in June; 10.2 percent in July; 8.4 percent in August and 7.9 percent in September.

So what are we to make of this? Is everything going to be all hunky-dory if we just wait a bit? Is this Covid economy just a weird, atypical, phenomenon?

This is where Cutts comes in. Economists know how the dominoes fall and how stimulus money can patch up the broken stuff.  And Cutts has some serious economic chops.

Recently, she was elected a director for the National Association for Business Economics for a three-year term starting in 2020. (That’s prestigious, folks.) The other biggish deal in terms of her resume is in 2015 she won the Pulseconomics Crystal Ball Award for Outstanding Performance in the Zillow Home Price Expectations Survey for forecast accuracy.  She has been a participant in the Wall Street Journal’s Monthly Survey of Leading Economists.

And yes, it’s true, all financial crises are not created equal. But my money’s on her to help us figure out what’s coming.

But this time it all seems a bit trickier. We are dealing with a global pandemic, not payment-option ARMs. The job losses have been sweeping and the rapid swings in economic data have been mindboggling.

It’s left us wondering are we in Phase 2, or Phase 3, or just in flat-out Phase fatigue? And are we going backwards or forwards in our Phase gyrations?

Help us out here, Amy.

Good with numbers

There’s no doubt ACC knows her numbers.  She’s been watching them for a long time. Numbers are her stock in trade.

Her undergraduate degree is in applied mathematics from Trinity University, in San Antonio, Texas. She has a doctorate and a masters degree in economics from the University of Virginia.

Her take on what’s happening now is informed by years of serious research. That’s why her remarks at a NEXT webinar on September 17 titled “Using Alternative Data to Widen the Credit Box” got our attention.

“I am very worried about where we are right now,” Cutts said.

She told the webinar audience, “People keep calling it a recovery. We are not in recovery. We’re just coming up off the bottom. And it was a terrible bottom.”

She is even calling for a HARP 2.0 program, the streamlined refinance program rolled out during the early stages of the Great Recession to help lower housing costs for homeowners who otherwise could not qualify. With millions currently unemployed this could help save homes.

Cutts says special mortgage forbearance plans have also helped borrowers facing temporary financial stress and could prevent a big spike in delinquencies as those temporary plans start to expire early next year.

“We will start to see the main impacts next April, rolling out over several months. Most will have rolled off in June. If we are lucky, the virus will be more under control, employment will have rebounded, and we will emerge on the other side with a small rise in delinquencies.”

Cutts says the populations being hit worst by the Covid crisis are people of modest and low incomes and young people just starting out. Statistics from the Urban Institute’s Housing Finance Policy Center show renters are especially vulnerable. Those numbers show 38 percent of today’s renters are in the industries most hurt by Covid, while 30 percent of homeowners fall in that category.

A study from the Research Institute for Housing America (RIHA) assessing the first three months of the pandemic, found that millions are facing this economic reckoning. “The report found that 11 percent (5.88 million) of renters reported a missed, delayed, or reduced payment, while 8 percent (5.14 million) of homeowners missed or deferred at least one mortgage payment,” according to a press release.

Cutts understands the people behind the numbers.  Graduating into a pandemic economy will be tough sledding for those kids behind the numbers. Low-income wage earners are not a foreign species to her. She worked several jobs in college to pay her tuition. And restaurant workers are very real to her, as it turns out.

Horsing around

Cutts was not born in some ivory tower on the East Coast. She isn’t from some legacy family with its name on Ivy League buildings. She is from Colorado. She grew up in Longmont, now a rather large suburb of Boulder. Her roots are in the West. (The real West, not the West Coast.)

And she never set out to be an economist—far from it. Early on, she planned to be a professional equestrian show jumper. (At 11, she was jumping on the backs of some rather large horses, Gutsy, right?)

She says, “I won just about every award possible in the state and qualified seven times for the junior national equitation finals. What I lacked was a rich family that could afford many (or even one) great horses. I catch-rode whatever was available and was grateful for all the opportunities given to me.”

She paid for college by grooming horses professionally, braiding manes and tails of horses at the barn where she trained and at other stables. It was hard work, starting at around 10 PM and going all night until around 10 AM or 11 AM.

Those hours were “all spent standing on a short ladder, being bumped, bitten, kicked, stepped on and worse.” But she says, “I made good money and I loved it.”

When she applied to college she thought she wanted to be an engineer. She applied to several colleges including Trinity in San Antonio and the Colorado School of Mines, getting accepted at both.

But she wasn’t sure she wanted to be a petroleum or mining engineer—the focus at the School of Mines. So after a tip from a friend, she visited Trinity and was sold, even though they only had a generic engineering program. But after arriving on campus, she never enrolled in an engineering course. She says, “I was not all that interested, it turns out.”

She switched instead to becoming an applied math major. But it took her a while to find her applied-math focus.  “I tried physics (oh, so very dull). Then chemistry (loved it, but didn’t have the money, or time, for all the labs since I was working three jobs to pay for it all). Then came computer science (oh, no, no, no, nooo!).”

In her third year at Trinity, she decided to take an economics class to satisfy a social science requirement, and, because she could borrow her roommate’s textbook.

“I fell in love with it from the first class. It spoke to me,” she says.

Getting into housing

Cutts applied to six different economics doctoral programs and was accepted at four. A generous aid package from the University of Virginia, and the fact it was a top-ten program, sold her on Charlottesville.

Her dissertation was on the statistical measurement of the impacts of public housing and housing vouchers on the economic well being of families. So, housing policy came into her life pretty early on.

After graduation, she took a job as an assistant professor of economics and senior researcher at Syracuse University in the Center for Policy Research in the Maxwell School for Citizenship and Public Affairs.

While at Syracuse, Cutts was invited to work on a project for the Department of Housing and Urban Development (HUD) to measure the size of the multifamily origination market.  She later learned the research was used to set affordable housing goals for Freddie Mac and Fannie Mae.

Around this time she also got a mortgage of her own. “So I learned firsthand how that all worked. I was baffled by it all.”

“That was the sum of my mortgage and housing finance background when Freddie Mac called and invited me to apply for a position as an economist in their research department. After three and a half years, I bid SU farewell and moved to northern Virginia,” she says.

Learning the trade at Freddie

Cutts worked under seven CEOs during her time at Freddie Mac. “I saw a lot of good leadership and a lot of not good leadership during that time,” she recalls. But Freddie’s economics department was always first-rate from top to bottom, she says.

“I spent 13 years in the same department at Freddie Mac, learning from the best housing and finance economists. No university in the world could come close to the brain power that Freddie had in its research group,” she says.

She says she learned a lot and was fortunate to work for Ed Golding and Frank Nothaft. Both were supportive mentors. She also worked with Bob Van Order, Richard Green, Yan Chang, Michael Bradley, Jim Berkovec and many others in what was a powerhouse of housing market research.

She began her stint working for Peter Zorn. She managed production of the Freddie Mac Conventional Mortgage Home Price Index. Then she worked on conducting fair-lending reviews of Freddie Mac models and policies for the next few years.

Cutts won an award for her contributions to a 2001 rebuild of the LoanProspector® automated underwriting system that expanded the set of loans that got an “Accept” or “Accept+” rating, while at the same time reducing the set of loans that if accepted would later default.

She then went to work for Frank Nothaft when he was promoted to chief economist. “I got to learn about the practice of economic forecasting, how to advocate for good housing policy and honed my speaking skills under his guidance.”

She must have been a quick study because she became “a busy speaker on the conference circuit.”

That all ultimately led to her leaving Freddie and becoming chief economist at Equifax in March 2011.  There she broadened her horizons to cover all of consumer finance, not just mortgages.

Which brings us to this million-dollar question: What’s her forecast for the Covid recovery?

Lessons from meltdowns

Cutts tiptoes through what we know and what we don’t know, at this very moment, because the Covid story keeps changing and has so many moving parts. And, importantly, another stimulus package could be key.

“It will take a while before we start to see the real damage [to consumer credit] only because the CARES Act was a huge help to consumers facing income or job loss. That said, the damage will be long lasting unless Congress acts soon and with the same intensity that was incorporated into the CARES Act. Many economists have been very vocal about this on Twitter and in op-eds.”

Cutts says the economic damage from Covid will differ greatly from that suffered during the Great Recession.

“[T]he damage to consumer credit [availability] will be relatively small as it won’t cause lenders to fail like we saw in the Great Recession. The current portfolio [of loans] is well underwritten. That said, there are other big risks to lenders outside of consumer credit. In particular, commercial real estate is a disaster as shuttered stores and some major retailers have stopped paying rent. CMBS for retail and lodging are seeing unprecedented levels of defaults”

And in terms of multifamily, she says, “Eviction moratoria, though well-intentioned, put landlords in a tricky spot. They also have obligations, and if the renters are not paying, then they may end up defaulting on their loans.”

Cutts adds, “The moratoriums are unfunded mandates on landlords, most of whom are small individual investors.”

Speaking to policymakers, she says, “I cannot say strongly enough that every dollar we put into [unemployment insurance] benefits and other household support will pay for itself many times over by supporting consumer spending and debt service.”

What else did she learn from the Great Recession?

“Leading up to the financial crisis and the Great Recession everyone in the industry (regulators, academics and financial services companies) was focused on systemic risk coming from the interest-rate side. What we all learned the hard way was that credit risk was the real threat,” she says.

She adds that accounting changes (FAS 144) “incentivized extreme risk taking” in the mortgage markets back then, and that, in turn, fueled the scope of the crash. (She has a book in mind about this, but hasn’t yet found the time to write it.)

Does she see anything close to the wave of defaults and foreclosures that took place during the Great Recession? “No,” she says.

The new book of loans “will likely have stellar performance,” she adds.

“New loans are not the issue. It is existing loans that entered a forbearance agreement that will be the sticking point,” she says.

She worries about the newly unemployed whose credit will be dinged up in the aftermath of Covid.

One thing Cutts has “railed against for some time is regulators discouraging banks and other highly regulated institutions from engaging in lending to borrowers with subprime credit. This pushes the most financially vulnerable to engage with less regulated, and often predatory, lenders.”

“We still have so much to learn about different banking models and how to work with borrowers,” she says.

That’s not to say she isn’t a huge fan of U.S. credit markets. “[T]he US consumer credit market is the most liquid, the most fair, and the best functioning in the world. It starts with the national credit bureaus, which broker trust between lenders and borrowers, and reports the full consumer file, both positive and negative. The system has its faults, but, wow, are we ever lucky to have them.”

No surprise, then, that she feels lucky to have worked where she has. “I think I have been enormously lucky to work at two financial services institutions whose very DNA is a social mission that furthers low-cost, widely available consumer credit.”

Full circle

So remember how she really loves horses. Well, that never went away. She now owns two of her own—Bond and Jordan.

We wonder if she grooms them herself—or if she pays some college kid to do it. (My money is on her doing it. But she probably doesn’t burn the midnight oil like she did before.)

Today, Cutts lives in Reston, Virginia, with her husband Jim, her son Andrew, her nearly 98 year-old grandmother (Franziska Stein) and two cats (Larry and Wiley).

Things have kind of come full circle for her.

Back when she was little, growing up in Colorado, Cutts “worked” in her German grandmother’s restaurant, where her parents would leave her in the care of her Oma and Opa.

“I would peel shrimp, wrap potatoes in foil for baking, peel eggs and chop parsley,” she recalls.  She started young, when she was just about six years old. It taught her about hard work, discipline and the long hours required to survive in the restaurant business.

Her grandmother was just the kind of small business owner that Covid is beating up on right now. Restaurant owners and workers are being slammed. That has to be in the back of Cutts’ mind as she models her forecasts for job losses.

Ostensibly, these days, Cutts is the one taking care of her Oma. But we suspect her grandmother is holding her own—still teaching Cutts a thing or two about resilience and grit and hard work and life. (After all, Franziska is the one who has already written and published a book: “Chopin Through the Window: An Autobiography.” Her granddaughter did get an editor’s credit.)

Hard work, determination, customer loyalty and resilience are among the X-factors that keep small businesses afloat, even in the best of times. But during Covid, those very intangibles will determine which hard-hit restaurant owners and their employees survive—and which ones don’t.

It’s the stuff they can’t teach you in economics grad school. It can’t be reduced to a number. But your grandmother can teach you about it. And it starts with showing up and chopping parsley, without complaining. Here’s a knife.