Fannie, Freddie execs say they’re active in mortgage market, foreclosure relief
Under their new government-appointed chief executives, Fannie Mae and Freddie Mac are focused on reducing foreclosures, improving liquidity in the mortgage market and restructuring aspects of their business, according to a panel discussion of the executives and their government regulator at the Mortgage Bankers Association annual conference here Monday.
They’re working with lenders and loan servicers to ensure foreclosures are avoided where possible — including measures such as lengthening loan terms and reducing interest rates — Fannie Mae’s and Freddie Mac’s chief executives said, and they’re also actively working to improve liquidity in the mortgage markets.
The two government-sponsored enterprises were taken over by the government in September, in the first of several government bailouts recently meant to try to halt the spread of the mortgage-fueled credit crisis. Fannie and Freddie own or guarantee almost half of all home loans in the U.S., making the health of the residential real estate market at least in part tied to their well-being.
“This is a very critical time in the economy and certainly in the mortgage markets and we at Fannie Mae are doing all we possibly can,” said Herbert Allison, chief executive of Fannie Mae.
“We have the financing we need right now to be active in these markets and the proof is in the level of activity we’ve achieved in the past few weeks,” he said. “In the primary market we’re facilitating about $40 billion a month right now in loans and guarantees. In the secondary market, we’re on track to increase our assets by about $100 billion.”
To some degree, improving the housing market and alleviating the credit crisis requires investors and others to realize that Fannie Mae and Freddie Mac now have clear U.S. government guarantees, said James Lockhart, director of the Federal Housing Finance Agency, the regulator overseeing Fannie and Freddie.
The government put in place three tools for accessing credit to help Fannie and Freddie, Lockhart said. “First and by far the most critical is the senior preferred facility. It protects all debt in mortgage-backed securities,” Lockhart said. “The amount is $100 billion each, three times their required minimum capital. It has not been used yet,” he said.
“The second facility [is] Treasury going out in the open market, purchasing mortgage-backed securities from Fannie and Freddie,” Lockhart said. “The third is available to Fannie and Freddie and federal home loan banks: A secured unlimited credit facility,” he said.
“The capital structure of these two companies will be sorted out over time but right now we’ve got access to $100 billion of capital and we have access to unlimited liquidity. We are out there with many people in the mortgage market today. We are providing very substantial liquidity to these markets. We are there for people who want to own homes,” Lockhart said.
Given the complexity of the financial markets currently, with many problem loans repackaged into securities and sold on the secondary market, and many highly leveraged companies not realizing the level of risk on their own books, the process of securitization itself might be one area of change.
“There’s going to be a reassessment of risk-taking and of securitization. I think we’re going to see some new approaches to that, probably more conservative approaches,” Allison said. He did not offer any specifics during the panel discussion.
Focus on foreclosures
Fannie Mae and Freddie Mac — and a protester who wandered onto the stage – discussed preventing foreclosures.
“One initiative is to take a second look in situations that have been referred to foreclosure, to see whether on a case-by-case basis we can somehow recover a number of those loans and keep those people in their houses,” Allison said.
“We’re also restructuring loans either by interest rate reductions over a period of time or lengthening out the loan maturities or providing upfront term loans so they can get current again,” he said.
Meanwhile, at Freddie Mac, “we’re focusing on foreclosure prevention, on what can we do to keep people in their houses,” said David Moffett, chief executive of Freddie Mac. “Quite frankly, each person’s situation is different.”
At that point, a middle-aged woman walked on stage. She could have been mistaken for someone making a conference-related announcement. But then she spoke.
“You said the only way to keep the homes from foreclosure is on a person-by-person basis,” the protester said. “Regina Whitaker in Alexandria, Va., is losing her home … will you help her keep her home and call for a moratorium on foreclosures? Will you please call for that, sirs?” the protester asked, before being led offstage by MBA workers.
In the main, the panelists seemed to agree with the protester that averting foreclosure is important, but none went so far as to call for a moratorium.
Their aim isn’t to save everybody, Lockhart said. “There are some people who speculated and bought five houses and there’s no reason those shouldn’t be foreclosed on,” he said. “But we need a way to keep people who got a bad mortgage or are having tough times, we need to be able to keep them in their houses.”
Of course, given the complexity of the investment products to which many mortgages are tied, it’s not always so easy to avert foreclosure.
Lockhart said the government’s asset purchase program would make their job easier. “We need to get some of these troubled assets off balance sheets of financial institutions. We need to rework these loans. It’s been very hard to do that in these private-label securities because of all these tranches. I’m hoping in this process we can be much more aggressive,” he said.
Also, Allison said, Fannie Mae is “looking at new ways of partnering with [mortgage bankers] and others to try to keep as many people in their homes as possible. We’ve prevented about 300,000 foreclosures but that’s not good enough, we need to ramp up our activities,” Allison said.
Moffett voiced a similar refrain. “We are continuing to find new ways to solve the foreclosure problem and we’ve not run out of ideas. I can reassure you we are working hard with our master servicers to resolve these issues, keep people in their homes and keep people from having to give up on housing,” Moffett said.
Times, they are a-changin’
Fannie Mae (FNM) and Freddie Mac (FRE) are being revamped going forward. One change: The higher capital requirements now required of them, Lockhart said.
“These companies were much too thinly capitalized for what happened over the year. If they had more capital we might not be here today,” Lockhart said. “They became extremely leveraged. The capital rules were not appropriate for these two companies … everybody had a share in this. The risk was mispriced for two or three years.”
Also, risk-taking measures are being reassessed. “One of the first steps we took was to strengthen our checks and balances within the company, especially in the risk-management area,” Allison said. “We’re also going to be revamping our operations and systems.”
Even the basic drive of a publicly traded company to ramp up return is being reconsidered. “In this environment, we think it’s important that instead of focusing on maximizing returns that we focus on what is the minimum return on capital that is necessary to ensure the safety and soundness of Fannie Mae and serve you as effectively as possible,” Allison said.
Both Allison and Moffett said they are reviewing their companies’ pricing policies.
“We’re asking the question across the board: What is the requisite pricing for the risk we’re taking? Keep in mind we’re talking 30-year risk. We have to evaluate pricing in that context,” Moffett said.
“Freddie Mac is going back to the basics, reexamining every aspect of our business and how can we over the long run develop a sustainable model that provides a continuous source of liquidity on the single-family side as well as the multifamily side,” he said.
Lower mortgage rates ahead?
Lockhart would like to see mortgage rates come down so that more people could afford to refinance and buy into the market. He said the Troubled Asset Relief Program, or TARP, portion of the recently passed financial rescue plan might help.
“My belief is it really will have a dramatic impact on unfreezing the credit markets [and] an important aspect will be lowering mortgage rate spreads. The $250 billion preferred facility as equity will be very, very helpful for banks,” he said.
“The asset purchase program will be extremely important for the mortgage market,” he said. “As mortgage bankers, I would encourage you to take advantage of that facility. It will … help you modify and refinance a lot of those loans,” Lockhart said.