Federal Housing Finance Agency Director James Lockhart Offers His Expectations of The Fannie/Freddie Bailout
Monday, September 08, 2008PAUL KANGAS: While the Treasury played a key role in engineering the federal takeover at Fannie Mae and Freddie Mac, the man directly charged with regulating the mortgage giants is James Lockhart. He's the director of the Federal Housing Finance Agency. NBR's Washington bureau chief Darren Gersh spoke with Lockhart, and began by asking if Lockhart was satisfied with today's reaction from the mortgage market.
LOCKHART: Well, what we have seen so far, I think, is good. I think it's what we were hoping for. That people would realize that Fannie and Freddie are back in the game, that some of the risk that was priced in the market is starting to fall. And we're going to see hopefully mortgage rates fall and get more affordable.
DARREN GERSH, NIGHTLY BUSINESS REPORT WASHINGTON BUREAU CHIEF: Fannie and Freddie had been trying to ratchet up their loan requirements on mortgages in order to cut their losses and protect themselves from losses. Now that the taxpayers are in charge, you face a choice, are you going to loosen lending standards in order to prop up the housing market or are you going to tighten lending standards to protect taxpayers? Which are you going to do?
LOCKHART: Well, I think we're going to look at those standards and make sure that they make sense. As a conservator obviously we are trying to conserve the companies and -- but at the same time they have a very, very important mission of stability and liquidity and affordability. In fact, one of our key reasons for taking this action over the weekend is because we felt they weren't doing their mission. And in fact, if they had to start selling assets, that would have really hurt the market. So we're going to balance the safety and soundness in the mission.
GERSH: Well, let's tuck about the taxpayers. The Congressional Budget Office estimated, when Congress passed the legislation that allowed you to do what you did, that it would cost taxpayers $25 billion. The Treasury later hired Morgan Stanley to look at the books of these two companies and came up with a much larger figure, maybe close to $50 billion. Is that the range of the loss that we are looking at here?
LOCKHART: Well, I don't necessarily think the taxpayers have to lose anything over the long-term in this. Certainly the liquidity facility they are providing and the mortgage-backed security investments should work out very well. And then the other issue is the preferred stock that they are putting in, if needed. And that stock is only going to be put in if they get a negative net worth. And the cash will only be put in, in that case. And even if it is put in, there is no reason why, as these companies work their way out of their problems, that that stock won't be able to be sold for reasonably good prices. But there is certainly a -- you know, there going to be up front costs, potentially, if the companies need it.
GERSH: It sounds like from what you just said, that you are looking at a conservatorship that is going to last for years.
LOCKHART: We don't know the time, it is really hard to predict. A lot will be what happens to the housing market, if the housing market starts to recover sooner, I think these companies start to recover sooner.
GERSH: Well, you are still regulating these companies a couple of years before.
LOCKHART: Still am.
GERSH: Still are. (LAUGHTER) Morgan Stanley was brought in recently by the Treasury to look at the books. You have looked at these books before that, just a couple of months ago, and said that these companies were safe and sound. So what did Morgan Stanley learn that you didn't know?
LOCKHART: Not a lot, really. What I said is that they were adequately capitalized. And they were adequately capitalized according to the law on June 30th. The legal definition is -- I think I said yesterday is somewhat antiquated capital rules. They are much too low for a company exposed to this kind of risk. You know, we saw the Morgan Stanley review. But more importantly, we did our own review. And that was the key thing. We have ongoing examinations all of the time with these two companies. And there was with a significant deterioration over the last three months. Risks were just growing -- credit risks were growing. The losses on the private label mortgage-backed securities were growing.
GERSH: When I looked at the pay of the CEOs of these two companies, there were a lot of pieces to them. And frankly I gave up counting around $70 million over the last couple of years. Are you going to move to try to get some of that money back for taxpayers?
LOCKHART: Most of that payment was in the form of stock or options. And they are not worth very much at all at the moment. So you probably have to divide that number by three or four to get to really what they were paid.
GERSH: So a lot of that is cash, and they have exit incentives and things like that. So now that the taxpayers are on the hook, are you going to look at those payments and are you going to try to get some of that money back for taxpayers?
LOCKHART: We're not going to try to get part of the money back. In fact, as I just said, most of the money has come back by the fall of the stock prices and their options. We will certainly be looking forward, and as I think I said yesterday in my speech, the new CEOs will have salary and benefits significantly lower than the old CEOs.
GERSH: And, Mr. Lockhart, thank you very much for your time.
LOCKHART: Thank you.
