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RegFi Episode 56: Housing Policy Moves Front and Center on the National Agenda
 31 min listen

Justin Wiseman, Vice President and Regulatory Counsel at the Mortgage Bankers Association, joins RegFi co-hosts Jerry Buckley and Sherry Safchuk to discuss how housing availability and affordability have moved to the forefront of the national agenda. The conversation explores regulatory initiatives the new Trump Administration could take to enhance housing and mortgage credit availability and reforms advocated by the MBA to reduce closing costs. The group also assesses the potential impact of proposed AI-related legislation on the mortgage banking business and issues associated with bringing the GSEs out of conservatorship.

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  • Jerry Buckley:

    Hello, this is Jerry Buckley, and I am here with RegFi co-host Sherry Safchuk. Today, we are joined by Justin Wiseman, who serves as Vice President and Regulatory counsel at the Mortgage Bankers Association.

    Justin, you join us to record this RegFi podcast episode two days after the inauguration of Donald Trump. We'll be releasing it next week, but it's being recorded today, on the 22nd of January. And on Inauguration Day, the new president issued an order that read, quote, "I hereby order the heads of all executive departments and agencies to deliver emergency price relief consistent with applicable law to the American people and increase the prosperity of the American worker. This shall include pursuing appropriate actions to lower the cost of housing and expand housing supply," end quote.

    And then he goes on to list other areas that are covered by the order. But I think it's interesting that housing was the first listed, which seems to indicate that it's a priority. And specific to housing, the memo states, "moreover, many Americans are unable to purchase homes due to historically high prices, in part due to regulatory requirements that alone account for 25% of the cost of constructing a new home, according to recent analyses."

    With that background, Sherry and I would like this podcast episode to focus on the important juncture that we're at and the significant changes that are likely to occur in the housing sector, not only on the construction side, but as relates to finance, closings, and so forth.

    So, Sherry, I know you have a question.
    Sherry Safchuk:  Yes, thank you. Justin, thanks so much for joining us. I want to kick off my questions with talking about regulatory costs. Regulatory costs aren't confined to housing construction, and closing costs have risen sharply in recent years. Looking at the potential for making home buying more affordable, are there any regulatory changes that the MBA would advocate for to make the process of buying a home more affordable to more consumers?
    Justin Wiseman:  Well, obviously, this is something we've thought a lot about at MBA. And so, in the interest of making this, you know, a 30 minute podcast and not a two-hour podcast, I think I'll pick out some of the highlights, right?

    Something that immediately comes to mind is a cut to the MIP, or the mortgage insurance premium that FHA charges. The mutual mortgage insurance fund, or the MMIF, is over 11% right now and is a statutory target of 2%. So, the FHA insurance fund, in other words, is really well capitalized. A cut to that premium, the mortgage insurance premium, either the upfront or life of loan, you know, so they can sort of choose how they want to do it. We have our views. But in any case, any cut to the mortgage insurance premium is real relief to homeowners by lowering their costs of insurance on FHA mortgages. And as folks who follow housing finance know, FHA mortgages are the mortgage product most often utilized by first-time homebuyers or homebuyers that have less than, you know, pristine prime credit to go to the GSEs and things like that.

    So, music to our ears in the executive order and right down the fairway would seem to be a MIP cut, because that's something the government controls. And it's not as easy as pushing a button. There is a lot of work that FHA staff has to put in to do it, but it is something that's possible within government control.

    Something else that immediately comes to mind is, roll back the changes to building codes that HUD has proposed that would require essentially HUD-insured mortgages to meet a 2021 building code that's not in use in most states. That is in some ways a negative or a drag on the cost of home ownership. And it's going to add even more to the cost of new construction at a time we can ill afford to do so.

    Another issue that comes up a lot is the cost of credit reports and credit scores. It's something we hear about with great intensity from our members, as these costs have gone up tremendously year over year in recent years. So FHFA, as folks are probably aware, has proposed a transition that would move us from one score to two and three reports to two. I'm not sure how we get lower costs when we're buying two credit scores where previously we were buying one, but we also don't have the data necessary to implement or fully understand the ramifications of this proposal, so it's, I think perhaps, a hope that FHFA will look at this proposal and really think about how they can introduce meaningful competition into the credit score space, because one of the biggest drivers of the increase in credit score costs is FHA's requirements to have a certain score, three reports, and things like that.

    And the last thing I will touch on, and you asked me for solutions, and I'm already going against the question by putting a problem out here, but taxes and insurance costs are huge drives on home ownership affordability. Taxes going up is sort of in the control of local jurisdictions, but as we've seen from the recent wildfires in California and the hurricanes that hit North Carolina and Louisiana, home insurance premiums are skyrocketing.

    Traditionally, when you think about housing finance, people focus understandably on the principal and interest payment. But we've seen tax and insurance payments increase as much as 40 percent in some areas. And this is a huge drag on homeownership and home affordability if people could maybe make their mortgage payment, but they can't afford the taxes and insurance necessary to protect and stay in their home.
    Sherry:  Yeah, and I know that California has an insurance crisis right now, and they're struggling with all sorts of types of insurance, from earthquake insurance to fire insurance. And I don't think that's going to end anytime soon.

    Justin, you've worked at the MBA for much of your career, through times when rates were at unprecedented lows, and everyone was refinancing their mortgages. And now at a time when rates have reverted to what used to be considered normal, although now it's considered high. But of course, low rates over a decade helped to push house prices up. And now with house prices higher and rates higher as well, it's really hard for new home buyers to find a home they can afford. And it's really hard for homeowners to give up their low-rate mortgages and move up, which limits the housing stock for new buyers.

    It does seem like increasing supply by building more affordable homes using new technologies and with reduced regulatory restrictions on building may be one solution, but what other recommendations will MBA be making to Congress and the administration?

    And because I've been following the Real Estate Settlement Procedures Act since the beginning of my career, I'm really interested, especially in MBA's white paper, "RESPA at 50."
    Justin:  Yeah, no, no, I'd love to talk about that. Although I have to note, I always love when people say, you know, rates are back to normal. Well, like normal is what the rate was when you bought your house, right? So, it's always relative and very subjective what people feel like normal rates are.

    Yeah, thanks for the invitation to talk about RESPA. I love to talk about RESPA. And, you know, lawyers at Orrick taught me most of what I know about RESPA. So, I get it wrong, it's both your fault and you should correct me.

    So, let's talk about RESPA, and particularly RESPA Section 8, right? Folks probably know that RESPA, or the Real Estate Settlement Procedures Act, is turning 50 years old, basically, this year. And it is a 50-year-old statute that was passed or promulgated in the rules made for it at a time when we didn't have price discovery in the real estate market like we have today. Zillow wouldn't even be dreamed up in a day where you had to go to the realtor's office and literally physically look at the book of listings that the realtor was in possession of. Digital marketing, none of that stuff even existed or could have been contemplated when RESPA was passed 50 years ago. But the basic framework still remains and governs those new technologies and new modes of shopping for homes.
    Sherry: Justin, sorry to interrupt you, but can you just give our listeners a brief background on what RESPA Section 8 is?
    Justin:  Absolutely. Yeah, I fell in the Washington trap of immediately like going into jargon without explaining, which I should not do. 
    So, RESPA Section 8 is the prohibition in the Real Estate Settlement Procedures Act that functionally forbids a settlement service provider — so, in regular terms, think title agents, realtors, mortgage loan officers, et cetera — from paying for a referral. So, in other business contexts, it's actually quite normal, right? “Hey, you sent me this business. I appreciate it Here's a bottle of wine. Here's some sports tickets. Or here's even a referral bonus.”

    Well, that kind of behavior is explicitly outlawed by Congress in 1974 in the Real Estate Settlement Procedures Act and in Section 8. And that prohibition, which it seems simple on its face — you know, you shall not pay for referrals — has over time mutated into an incredibly complex analysis that touches every aspect of marketing. If you pay for a desk in a realtor's office, if you're paying “a little too much,” is there a hidden referral fee in there? Things like that that have created this enormous compliance infrastructure and cost.

    The other thing RESPA Section 8 does is govern the disclosures and relationships between affiliated business arrangements. Again, the whole idea is you don't want some sort of nefarious hidden referral fee being hidden through an affiliation or a joint venture. So, there's very prescriptive, detailed, and I would argue, outmoded requirements there to make sure that an affiliated business is bona fide or is not a sham arrangement.

    Our paper touches on all of this, why I sort of concluded my educational rest with affiliated business arrangements, so I'll talk about the recommendations there first. But there's some very simple recommendations that could be made, right? There's an estimate of cost that affiliates have to provide that isn't nearly as accurate as what the CFPB requires to be provided under the subsequent TRID rule that, you know, came at 30 years after RESPA. There's certain e-sign requirements. There are — a lot could be done that I would almost call just low-hanging fruit or a rationalization, though to make it easier for businesses to operate as joint ventures or in affiliations with lower costs to consumers.

    There's also a lot that could be done around digital marketing. We could do a whole podcast on the Bureau's digital marketing advisory opinion, and perhaps you guys have talked about it in the past, but I think it doesn't provide sufficient clarity for how people can actually market online and recognize the value of priority placement in online advertising.

    So, to sort of boil it down, perhaps too simply, the Bureau's advisory opinion suggests that one can't pay more for preferred placement on a website that does a digital comparison shopping website. But that goes anathema to most of how people understand marketing, right? More valuable real estate that more people are going to look at should be worth more. And to prevent that or to put a lot of layers of compliance there is going to make it more difficult for businesses to advertise, harder for consumers to find businesses, and just generally raise costs in the system.
    Sherry:  Would one suggestion be limiting the types of compensation that can be received? So right now, as you know, the definition of compensation is fairly broad. I think there was one CFPB advisory that I believe is no longer effective, but they said that the agreement itself was compensation. Do you think that maybe if we defined what compensation is a little bit more, that would be helpful?
    Justin:  That's a really great point. You said it's kind of broad. I would argue it is almost unfathomably broad, right? It is "a thing of value." The opportunity to appear on an esteemed podcast like this might be "a thing of value," right?
    Jerry:  You bet it is, Justin! No, I'm just kidding!
    Justin:  Exactly. In exchange for a referral.
    Jerry:  Ha ha ha. It's valuable for us to have you on. Go ahead.
    Justin:  Oh, well, thank you. You're very kind. But, you know, in an exchange for a referral is appearing on the podcast market. And I pick that as kind of a silly example, but it's to show that "a thing of value" is such a broad possible definition that, yeah, it is hard to comply with.

    I would argue, and we talk about this too, that some of this could be solved through enforcement of RESPA that complies with the existing case law, like the PHH case. And that enforcers of RESPA, like the CFPB, should really stick to the statute and prove out the three elements of a RESPA violation, right? A referral, an agreement to provide a thing of value, and not to sort of smash it all together and conflate it and say, “Well, it seems like you might have benefited from this arrangement, or you're possibly steering customers back and forth. Ergo, it's a RESPA violation.”

    That's not what the statute says, and that's not what the law says, and that's not how it should be enforced.
    Sherry:  Well, wouldn't that be similar to regulation by enforcement, which I know the industry has been struggling with?
    Justin:  Absolutely. I think RESPA is an area where we've seen, although, to be fair to the Bureau, there's not been a ton of RESPA enforcement cases, but the ones we've seen, certainly, I think, could fall into the "regulation by enforcement" category.

    Here, I think it's both regulation by enforcement and also a lack of updating of the relevant guidance, right? The lack of action in RESPA as technology has evolved is particularly problematic. And that's why when we put together our RESPA 50 white paper, we really tried to run the full gambit of recommendations for improving RESPA. From legislative recommendations all the way down to kind of guidance changes that could be enacted immediately, because it is a framework that kind of needs a root-and-branch look and possibly refresh.

    The other thing I want to talk about, because, you know, I could talk about RESPA for hours, but I also want to talk about the LO comp rule — and I will, before you even say it, I will explain the acronym I just used.

    So, the LO comp rule is the CFPB's loan originator compensation rule. It was part of the Dodd-Frank reforms after the great financial crisis. And again, in a very simplistic fashion, what the LO comp rule essentially says is you can't pay a loan officer, or the person who makes a mortgage loan, more money based on the terms and conditions of the loan. And this was in response to behavior during the crisis, where if the borrower's interest rate was higher, say, the loan officer made more money. And I think the reasonable takeaway from that is their incentives weren't aligned, right? The loan officer and the borrower's incentives weren't aligned. So, Congress passed what I would argue is a very strict and, again, kind of a unique to the mortgage industry law that said a loan officer can't be compensated based on a loan's terms and conditions. It can't be compensated by multiple parties. There's a dual compensation prohibition. There's certain steering prohibitions for brokers, things like that. It was essentially an attempt to reform LO compensation.

    Well, this is also an area that hasn't really been looked at in a while. It's definitely a lot younger than RESPA, but since the Bureau promulgated its rule back in, I believe, 2014 was when the final rule came out, maybe 2013, they haven't changed it. And MBA has long suggested, going all the way back to 2019, a few changes to the LO comp rule that we think would introduce more competition, lower costs for consumers, but not really touch the core consumer protections I talked about. 
    So, at the outset, I'll say what we're not trying to change, which is the ability or the lack of ability, I should say. What we're not trying to change is that a loan officer should not be able to make more money if they charge a customer more or they have more unfavorable terms to the consumer. What we're trying to change is three things.

    First, we believe that certain bond loans, which are loans offered by housing finance agencies that often have caps on costs and compensation, can be offered by LOs who would accept a lower compensation for that bond or HFA loan. And to me, that's just common sense, right? This is a beneficial product for a consumer, but it's often got strict eligibility guidelines or is the only product the consumer is eligible for. So, there's no real risk of steering. And this would allow more companies to offer these loans instead of the current situation, which is because the LO's compensation is held constant, they often have to take a loss to offer a bond loan.

    The other of the three, so number two of the big three, is around loan originator errors. So currently, you can't penalize a loan originator for errors that they make in the manufacturing of a loan. And so that creates kind of a draconian situation, right? You can't claw back some of the compensation, so you either accept the error or you fire them, essentially. And we think that allowing for reasonable fallbacks when there are errors, consistent, of course, and I have to say this, with state wage and hour law. So, it's important how their compensation is structured. But we think that will introduce more discipline to the market as generally a net benefit for compliance.

    And then the last one is the one that perhaps gets the most discussion. That is allowing the loan originator to lower, and I'll say lower again because it's important, lower their compensation in response to demonstrable competition. We believe that's helpful because people are incentivized to shop when they know they could get a lower price. The whole point of the TRID rule was, as I understand it, to make it easier for consumers to shop. And we believe that the benefit of shopping would be enhanced if, in clear situations of competition, the LO reduces their compensation because right now the company can, but there's a limit to how often they can do that. If the LO is willing to accept reduced compensation to make the deal happen, we think that benefits both the consumer and the company, who gets to make the loan.

    And I'll pre-address the big objection we often get here, which is who is going to get those competitive concessions. I'll make two points. Companies currently can offer the concession, and they do, and the fair lending problem that people often put forward has not to date really come out. I know the Bureau has been heavily involved in looking at competitive concessions at the entity level, and fair lending controls hopefully seem to have held relatively well across the industry. And then the second piece I would say, is that if you have a competitive concessions regime, that doesn't relieve anybody of their fair lending responsibilities.

    So, while they may be able to lower their compensation and not have an LO comp or TILA violation, they still would remain subject to the Fair Housing Act, ACOA, and all the other prohibitions, that would prohibit compensation based on protected characteristics or a pattern and practice of denying compensations to certain groups.

    So those are kind of our two big regulatory enactments that I think we can touch on today, in the interest of time, not doing the other million ones. But I have to kind of conclude here with also you got to build, build, and build more, right? Everything we want to do at MBA is beneficial, we hope, for home ownership, but that's on the demand side. And as you outlined in your question, we are fundamentally in a supply-side problem, right? There's just not enough housing supply for everyone who wants to purchase a home.
    Jerry: You know, Justin, there's probably a very strong alliance between the National Association of Home Builders and the Mortgage Bankers Association in seeking a much more robust housing production agenda.

    As you went through your list of some of the issues that can be addressed in a regulatory context, I was thinking, really, this agenda is going to have to be vetted by a new group of HUD personnel, primarily HUD personnel, and some of the CFPB — and a lot of CFPB. I think it will be interesting to see how that conversation moves forward. What is the mechanism for picking off these issues; what priorities are going to be given? And that's going to be your challenge over the next few months.

    Have you had any initial conversations, or is it just too early to begin that process?
    Justin:  So, I think what's heartening is both campaigns really centered housing as a priority. So, we've been, you know, we talked to everyone in town and we've certainly been in touch with folks in the Trump orbit to talk about our priorities. We have good relationships with the folks that are sort of helping formulate policy. And we've begun to have discussions with the nominees. So, you're right. It's a very crowded landscape with a lot of potential different priorities, but we're very, I think, heartened and optimistic by the fact that everyone seems to recognize, and you referenced the executive order at the beginning of our conversation, that housing needs to be one of those priorities. And hopefully we'll cut through the other competing priorities so that we can see some relief and some positive changes that make homeownership more affordable.
    Jerry:  Well, it is the issue of the hour. There's no question about that.

    Justin, there probably is no area of our economy that won't be impacted by the advance of artificial intelligence. And the mortgage business will be no exception, as you know. The MBA has a strong economics and research capability. Would you be able to share some of what MBA is doing to anticipate and take advantage of the efficiencies that AI can bring to the home lending process?
    Justin:  So, we have the Mortgage Industry Standards Maintenance Organization, or MISMO, that tries to be a convener and make sure that people are educated about the benefits and potential of AI, that there's robust conversation going on in the industry around AI. And I'd certainly encourage anyone who's interested in AI in the mortgage industry to reach out to MISMO and see the important work they're doing.

    On the policy side, I'm actually maybe going to be an AI skeptic a little bit on this podcast, only because my AI skepticism is rooted in an imprecise or, I think, unclear notion of how a lot of people talk about AI and artificial intelligence. There's a lot of optimism for its potential. I share a lot of that optimism. But there's also a lot of fear around how AI can distort human decision-making or sort of make human decision-making recede into the background and give all the power to the AI and things like that. And unfortunately, I think the fears are in some states leading the way and leading to state laws that can encumber mortgage lending in some really negative ways.

    A lot of our work in AI today on the policy side, and it's led by my amazing colleagues, Gabriel Acosta and Liz Facemire, is around educating state legislatures about how we don't use AI. And to put it another way, it's to say there is no magic black box credit algorithm floating out there that says, “Give this person credit, don't give that person credit,” without human review, override, or controls built in. The mortgage industry is perhaps slower than others to adopt AI. So, the tools that we use, and when I say adopt AI, I mean the generative AI, the chat GPT, the large language models that I think people are worried about, not the rules-based algorithmic engines we've had for decades. But those tools, the rules-based algorithmic engines we've had for decades are decades old, well-tested for any potential negative impacts. And yet they still get swept into some of these state AI bills that are imprecise in their definitions or overreaching in what they seek to cover.

    So that to me, honestly, unfortunately, is a challenge post-AI. It may encumber and make mortgage lending more difficult before we even sort of cross the Rubicon into really deploying generative AI. And I think we're probably not there relative to other industries and how the mortgage industry is using generative AI. It's fair to say it's in its infancy in the mortgage industry. And maybe, you know, the business climate, tight margins, and regulatory skepticism all play a part in that. But, you know, I don't know that we are taking advantage of the capabilities of AI outside of the consumer contact use cases as much as we possibly could. And we're fighting, you know, a war in the states to try and prevent ill-considered AI legislation from making it harder to make the mortgages we make today.
    Sherry:  Yeah, I've seen the AI issue at the state level, especially when automated decision-making tools are looped in as AI or if they're separately regulating those types of tools. I think it requires a lot of education. So, Gabriel and Liz have a lot on their plate. 
    Given the change in administration, there's a lot of speculation about the future of not only the CFPB, but the Department of Housing and Urban Development. I know it's not fair to ask you, two days after the inauguration, but are you hearing anything in D.C. that may impact the financial industry?
    Justin:  Yeah, no, absolutely. It's absolutely, you could always ask me the question. It's like the law of D.C. punditry, right? Is you're going to ask the question, you can't hold me accountable for the answer six months later. So, any prediction I make is, you know, only good and valid for today.

    That said, you know, there has been a lot of talk, you know, DOGE, the Department of Government Efficiency. I think there is going to be a real push in this administration to streamline what they view as the bureaucracy and to sort of pare back some of the larger agencies. But the rhetoric that some people are saying is probably going too far, right? Like, a lawyer is always going to look at the law.

    So, I read the Dodd-Frank Act, and I don't think the CFPB is going to go away. Right. Tweets to delete it notwithstanding, it is a duly constituted agency that has now survived two challenges to its constitutionality at the Supreme Court level. However, having said that, post-Seila Law, which is the case that made very clear that the CFPB director now serves the pleasure of the president, it's clear that the CFPB is not an independent agency. It's an executive agency, and very much so.

    So, because of that, I would expect how the CFPB behaves, the enforcement climate, and things like that to change. That's not to say enforcement's going to go away. It will still be there. It'll look different. The way they use their public-facing tools will be very different, and hopefully that means the end of regulation by blog posts, the bully pulpit, and things like that.

    Similar with HUD, how they prioritize different initiatives is likely to change, but particularly given the focus on housing, and a nominee in Scott Turner who has a background in Opportunity Zones, I would expect this administration to use HUD in a way that would push forward their homeownership agenda.

    The last thing I would put on the table to consider as things that may change is obviously fair lending enforcement will continue. It was there during the first Trump administration. But the method of analyzing sort of fair lending questions and the theories of the law that the enforcers apply likely will change at CFPB, HUD, and DOJ.
    Jerry:  Well, Justin, that's a good catalog of issues and where things are going. But as you say, none of us really know exactly what the timing is going to be and what's going to be prioritized. And a lot of it will depend on who gets appointed. And there's no one appointed for CFPB yet. But as you know, to be Secretary Turner is appointed for HUD.

    We're just about out of time, but are there any other last observations you'd like to share with our listeners about the current situation or MBA's priorities?
    Justin:  Yeah, no, absolutely. And maybe this is an extreme case of burying the lead, but I think GSE release — so, that is the release of Fannie Mae and Freddie Mac from government conservatorship — is far and away the most impactful issue when it comes to the future of housing finance in this country, not in the next two years, but in the next 10 to 20 years. MBA is fully engaged in these discussions. I think for the first time in a long time, I would bet money — maybe 51/49 — that we're going to see serious attempts at releasing the GSEs from conservatorship. And that opens up a whole panoply of issues. But the thing that we think is most important and has to be the center of any conversation is that we need an explicit backstop for GSE MBS, an explicit federal guarantee that ensures that we have the affordable 30-year fixed rate mortgage that is unique to this country, and is one of the greatest wealth-building tools in any market anywhere. But it's not automatic, right? And we need to ensure the stability of that market through a guarantee on GSE MBS, which would require congressional action and not just an administrative release.

    The other big thing I'd encourage people who listen to this podcast to focus on is the tax fight that's coming is going to be huge. The Trump tax extenders are going to expire. There is a strong desire to extend them or to provide other tax relief. And the, both relief provisions and then the payfors that are going to have to be found to pay for the tax cuts are going to touch all parts of the economy. And MBA is going to be very vigilant to watch out for any tax changes that could positively or negatively impact the mortgage industry and housing as we enter into this discussion.
    Jerry:  You know, I'm glad you brought up the GSEs. That was the question I wanted to ask you earlier. And it is one that has your 51; was it 51-49? [Yeah.] Estimate is interesting. Lots of questions about the priority of the government and how much would be needed to capitalize the newly released GSEs. And of course, the questions of exactly how the government guarantee would work are also going to be at play. As you say, this is something that Congress will have to look at, but the initiative will clearly probably have to come from the administration.
    Justin:  Yeah, no, absolutely. And look, there is a path, right, where you could do GSE reform without Congress. It's an open question, though, if you can put in place the kind of safeguards that the market would expect and do so in a way that would not result in much higher prices, ratings downgrades on GSE securities, or otherwise disrupt the market. So, while you could do it administratively, it's best done with Congress's participation, in our view.
    Jerry:  You know, this is a subject for an entirely new podcast episode. And as things develop, maybe we'll ask you or others from the MBA to come and have a further conversation on that, because it's an extraordinarily important issue, as you pointed out.

    So, I want to thank you for joining us. I know our listeners thank you as well. It was very helpful. And I think it sort of, we asked you to come on at a time when things are just starting to change. And so, you gave some interesting insights. Justin, thank you. 
    Sherry: Thank you.
    Justin:  Thank you very much for inviting me and for the partnership between Orrick and the MBA, which we're really appreciative of. 
    Jerry: It's a great relationship. Thank you. We really appreciate you being with us.