One on One with Mark Zandi, Chief Economist for Moody's Economy.com
Thursday, July 10, 2008
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SUSIE GHARIB: Joining us now for more analysis on the future of Fannie Mae and Freddie Mac, Mark Zandi, chief economist for Moody's Economy.com. Hi, Mark.
MARK ZANDI, CHIEF ECONOMIST, MOODY'S ECONOMY.COM: Hi, Susie.
GHARIB: Well, politicians are saying that Fannie and Freddie have adequate capital, but investors on Wall Street seem to be saying that both companies are in danger of becoming insolvent. Who is right here?
ZANDI: Well, I think it's clear they don't have enough capital. They, I think, are far away from insolvency, if you tote up the capital for both, it's about $80 billion as of the end of the first quarter. So I don't think insolvency, at least not now, is an issue. But they need more capital and they need it so that they can become more aggressive in extending out more mortgage loans and other credit so that this housing market can get going again.
GHARIB: And where is this capital going to come from? What are the options?
ZANDI: Well, they're going to have to issue new equity. They're going to have to go back to stock investors and say, you know, buy my stock, I need capital. Unfortunately, it's going to be very tough for existing shareholders. They're going to be deluded and therefore the value of their stock holdings are going to be much less, but that's what's going to happen here. They're going to have to go back to the stock market and just raise more capital.
GHARIB: Treasury Secretary Paulson is pushing for a new, more powerful regulator of both Fannie and Freddie. Now while that may be a good thing, I mean, how does that in the near term solve a lot of these fundamental problems?
ZANDI: Well, it may help if it restores confidence. I think one of the problems that Fannie and Freddie have is no one trusts the numbers. They don't trust the information they're putting forth. You can see that in today's news report. People really don't believe that -- what they're saying. So if you have a strong regulator that everyone trusts and the regulator imposes discipline, then that will create confidence, and that confidence will be key to their long-run survival.
GHARIB: One of the main issues at the core of all of these problems is what's going on in the housing market. How much longer do you think that this country is going to go through a housing crisis and prices continue to fall and their mortgage losses keep mounting? What's your outlook?
ZANDI: Yes, you know, I think it's another year. Prices have been declining for two years. The peak was the spring '06 selling season. Since then prices have nationwide have fallen about 15 percent. I think it will take another year and another 10 percent decline before housing values get back in-line consistent with incomes and rents and we get people back in the market thinking this is a good buy. So another year.
GHARIB: And what is the role of high oil prices have on all of that, because a lot of people's sense of well-being comes from their current economic situation? When you're paying a lot of money for gas, you probably are not too much in the mood to buy a house or anything else for that matter.
ZANDI: Yes, you know, there is nothing more debilitating than the high energy gasoline prices. It's what driven consumer confidence to lows that we haven't seen in the early '80s. It's particularly hard for homeowners, let's say they bought a big home out in the exurbs, somewhere 50, 60 miles away from their work. When gas prices are up, it becomes untenable to own that home and commute in. So it's a real problem. We need a little bit of luck. And hopefully those oil prices start to come down. At the very worst, hopefully they don't rise. We certainly would have a tough time with that.
GHARIB: It has been a year now that we've been going through this credit crisis, and today there was news that for the first time no Wall Street firm borrowed any money from the Federal Reserve's emergency lending program over the past week. How do you interpret that information? Is that a sign that things are improving in this credit crisis? Is it coming to an end?
ZANDI: No, not necessarily. You know, I'm not taking too much solace in that yet. I mean, clearly the investment banks, the primary dealers who can use that credit facility are under a lot of stress. Just look at the stock price for companies like Lehman Brothers (LEH) and Morgan Stanley (MS). So I don't know that we can take a whole lot of solace from that at this point. The crisis continues on, it's not as bad as it was back in mid-March when Bear Stearns collapsed, but it's still not where it needs to be. And I think we have got a ways to go.
GHARIB: All right. Mark, thanks a lot for all of that information. We really appreciate it.
ZANDI: Thank you.
GHARIB: My guest tonight: Mark Zandi, chief economist for Moody's Economy.com.
