Freddie Mac

James Lockhart, Director and Chairman of the Oversight Board at the Federal Housing Finance Agency (the entity overseeing Fannie Mae and Freddie Mac) joined Ellen Seidman to discuss the conservatorship of Fannie and Freddie. The interview followed an event, "Foreclosures: What are Fannie and Freddie Doing to Stem the Tide?" on November 13.

The announcement yesterday of new procedures for streamlined modifications of primarily prime mortgage loans in trouble was a perfect example of a good (albeit overdue) program being drowned by a really inept rollout.

Briefly, Fannie Mae, Freddie Mac, their conservator the Federal Housing Finance Agency, the Hope Now Alliance and a group of large banks announced standard procedures to do quick modifications-involving primarily an appraisal and verification of income-of seriously delinquent loans in either Fannie or Freddie MBS, or in the portfolios of either the GSEs or the banks. There are clear limits on what is involved. The big one is these are largely prime loans, and loans for which the servicer has relatively undivided loyalties. They are not the privately-securitized sub-prime and Alt-A loans that have caused the bulk of the problem to date, especially in lower income communities. That's a big limitation, but the fact is that the prime foreclosure rate is increasing steadily. And as of June 2008, there were about 373,000 Fannie and Freddie owned or guaranteed loans (many of them prime) that were seriously delinquent, and the number was climbing fast. That's Fannie and Freddie alone, not counting loans held in bank portfolios.

Fannie Mae found itself on the front pages once again this week with the news that it lost $29 billion in the third quarter of 2008. Scarier still, Fannie's net worth, which was $44 billion at the end of 2007, now stands at a paltry $9.4 billion.

It has been over two months since Fannie and Freddie were seized by Federal regulators and put into conservatorship. Many of us are wondering, simply, what has happened since? Have they been more active in dealing with the continuing struggles in the housing market? Are regulators upbeat about the future of the mortgage giants?

On Thursday, November 13th from 3:30 pm to 5pm, the Asset Building program looks to find some answers to these questions. We are pleased to welcome Jim Lockhart, Director and Chairman of the Oversight Board, Federal Housing Finance Agency-- the entity that is overseeing Fannie and Freddie-- to discuss this pressing topic. Joining him will be Barry Zigas (Director of Housing Policy, Consumer Federation of America), Gregory Baer (Deputy General Counsel, Regulatory and Public Policy, Bank of America), Ellen Seidman (Director, Financial Services Policy, Asset Building Program), and Maya MacGuineas (President, Committee for a Responsible Federal Budget and Director, Fiscal Policy Program, New America Foundation).

We hope you join us for what certainly will be a lively and informative discussion. Click here to RSVP.

What I said is that they were adequately capitalized. And they were adequately capitalized according to the law on June 30th.
-James Lockhart, Federal Housing Finance Agency Director (September 8, 2008)

This was not the case according to Morgan Stanley, which was pulled in by Treasury Secretary Hank Paulson to analyze the health of Fannie and Freddie in early August.

After the Fannie and Freddie bailout, many law makers will try to create independent oversight over these large Government Sponsored Enterprises (GSEs). But Morgan Stanley reported that a bailout would cost upwards of $50bn, while William Poole estimated it may be as high as $300bn. Furthermore, the bailout will not turn around falling house prices, which are more the result of a massive price correction and not of the price of mortgages.

Barry Zigas, who headed Fannie Mae's community lending operation until 2006, and has a long history in affordable housing, is one of the most astute observers of the GSEs, especially from the perspective of their mission.  And he views the mission both from the broad perspective of making a high quality mortgage market (single- and multi-family) work for the vast bulk of Americans and the narrower perspective of supporting sustainable affordable homeownership lending and affordable rental housing.  

Barry has written a superb analysis of the government's activities this weekend concerning Fannie and Freddie.  It's important reading.  He discusses both the positive aspects of the takeover and the issues that are too capable of falling below the radar, including: financing affordable housing--multi- as well as single-family; encouraging, rather than stifling, loan modifications to prevent foreclosures; handling REO to stabilize rather than further harm communities; and the companies' extensive charitable giving (in an environment in which other sources of philanthropy are also drying up).

Promises by the U.S. Treasury and Federal Reserve to support Fannie Mae and Freddie Mac have not reassured shareholders. By noon Tuesday, shares of Fannie Mae dropped 23.5% and Freddie Mac plunged 24.9%. Given the loss of investor confidence in these mortgage finance companies, it appears that the promised equity investment by the Treasury may be utilized. In addition, Paulson proposed increasing Fannie and Freddie's $2.25bn credit lines to an undetermined amount to ensure "flexibility" and "minimize taxpayer risk."

Snapshot asks, what is the limit of taxpayer responsibility to maintain Fannie and Freddie's share price and help maintain financial stability?

Wall Street Journal - Bernanke, Paulson Aim for Stability with Fannie, Freddie Proposal
U.S. Treasury - Testimony by Secretary Henry M. Paulson, Jr.
Ben Bernanke - Semiannual Monetary Policy Report to the Congress

If the U.S. enters a deep recession, a bailout to Fannie Mae or Freddie Mac could threaten the United States' AAA credit rating according to a statement from Standard & Poor's. Government sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac are large in size, have high common equity, and are highly exposed to a deteriorating housing market, leaving them vulnerable to a deep recession. If they go under and need a large cash infusion from the government, it could cost the country 10% more of GDP to service its debt.

Barron's - Is Fannie Mae the Next Government Bailout?
Wall Street Journal - Fannie, Freddie Could Hurt U.S. Credit
Bloomberg - U.S. Rating Threatened More by Agencies Than Bailouts, S&P Says