James Lockhart, Dir. Office of Federal Housing Enterprise Oversight
Wednesday, November 21, 2007SUSIE GHARIB: There's talk swirling in Washington of a possible bailout of mortgage lenders Freddie Mac and Fannie Mae. Yesterday, Freddie reported a $2 billion quarterly loss, due to the housing downturn. But as Stephanie Dhue reports, the man who oversees both companies says a bailout isn't in the cards.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Fannie Mae and Freddie Mac were chartered by the government to keep money flowing to mortgage lenders through the ups and down of the housing market, so rumors of a Federal bailout aren't surprising. But James Lockhart, the director of the Office of Housing Enterprise Oversight, known as OFEHO, says a bailout is not going to happen.
JAMES LOCKHART, DIR. OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT: There's no need for a government bailout. These companies are actually borrowing very cheaply at the moment and that's an exaggeration. The two companies have a lot of flexibility. They are out there raising capital. They certainly could lower their portfolios somewhat. For every dollar they sell in their portfolio, they can do $5 in mortgage-backed securities. So they have a lot of capability to do more in this marketplace.
DHUE: What the firms do want is relief from the restrictions regulators put on them in the wake of accounting scandals. Specifically, they want OFEHO to lift the limits on the amount of loans they can hold in their portfolios and to reduce the amount of capital the companies must keep in reserves to cover future losses. Lockhart says that won't happen, either.
LOCKHART: They were put in place for a very sound reason. The operational risk problems at these companies, the inability to put out accounts, risk management, internal controls. Yes, they are making progress, but they are not there and in fact in this market, there's a lot more operational risk, as we've seen. The models that have priced this have been misapplied, if you will, at rating agencies and other places, so there's a lot of operational risk and certainly there's growing credit risk.
DHUE: Lockhart says the companies can increase their lending by $30 or $40 billion before they reach portfolio limits. And he's encouraged them to raise capital in the markets to increase their lending capacity. Still, there are worries Fannie and Freddie could pull back their mortgage buying, hurting mortgage companies like Countrywide.
LOCKHART: Certainly, our role is not only safety and soundness, but also the worry about the mortgage market and particularly the secondary mortgage market where these two are the dominant players. And certainly we would be concerned about that. We see no sign that Fannie and Freddie cannot continue to buy mortgages from Countrywide and securitize them.
DHUE: Treasury Secretary Paulson and Fed Chairman Ben Bernanke have advocated a larger role for Fannie Mae and Freddie Mac, especially in the jumbo market. Is that a sound approach?
LOCKHART: I've said, on a temporary basis, that would make some sense. But at this point, I would have to say that, given their capital position, it would be better to stay in the conforming loan market and not go to the jumbo. They really don't have a lot of expertise in the jumbo market.
DHUE: You've advocated for legislation to create a tough regulator for Fannie Mae and Freddie Mac. What difference would that have made in this situation?
LOCKHART: Well, I think a stronger regulator might have had a better capital regime for these two companies, might have had a regulation out there that would have kept some cushion for these kinds of situations and certainly they would potentially have done different things in the portfolio cap area. There's also a whole series of other regulations that's part of the law that would strengthen the power of the regulator. I think if I had those powers now, I could be looking a little more comfortably at potentially changing their capital levels.
DHUE: Can you allow Fannie Mae and Freddie Mac to take on more risk in the broader interest of the housing market?
LOCKHART: What we have allowed and will continue to allow, is them to grow with their capital. Over this year, they have actually grown in market share from about 40 percent last year to over 60 percent in the third quarter and now 70 percent in October. They are doing securitizations of almost $100 billion a month, so that they are growing and what we want to insure is that they have that capital to continue to grow.
DHUE: James Lockhart OFEHO director, thanks for joining us.
LOCKHART: Thank you very much.
