MARGARET WARNER: And, for that, I’m joined by a reporter and a financial columnist covering this story. Charles Duhigg is with The New York Times. And Steven Pearlstein is a columnist with The Washington Post.
Welcome to you both.
Charles, beginning with you, you did a lot of reporting on everything that went on leading up to this. How and why did it come to a head this weekend?
CHARLES DUHIGG, The New York Times: It came to a head this weekend basically because this was the time that Treasury decided it needed to come to a head.
A few weeks ago, Richard Syron, who runs — is the CEO and chairman of Freddie Mac, made a last-ditch attempt to try and raise money from private equity groups. And he was turned down by everyone. He reported this to Mr. Paulson, the treasury secretary. And within Treasury, based on our reporting, a consensus emerged that it was time to act.
Obviously, it was a politically delicate time. Both conventions were going on. We heard that there was some discussion of trying to do this in a way that it wouldn’t conflict with the conventions, but, at the same time, would happen as quickly as possible, both to bring stability to the marketplace, and also because the election is now two months away, and they wanted to have something happen not at the same time — too close to the election.
MARGARET WARNER: Steven Pearlstein, do you agree the situation had gotten desperate, and why did the implicit backing that Paulson had given in July not do the trick?
STEVEN PEARLSTEIN, The Washington Post: Well, let’s start with the second.
It turns out that that implicit backing had a perverse effect, because what — when — when Mr. Syron went up to Wall Street and said, “Would you like to invest some — some more capital here?” people said, “Well, we might be actually interested in it, except we don’t really know the form and the timing of when the government might come in. They might come in and wipe us out. So, until we know what the structure of the government involvement might be and unless you can provide us some assurances of that, we won’t put any money in.”
So, it had this perverse effect, which I think was unintended.
Ties to economy
MARGARET WARNER: So, Charles, back to you.
First of all, is the number-one purpose here to keep Fannie and Freddie going and assure the ongoing liquidity of the market for mortgage money? Is that right? And, if so, will it work?
CHARLES DUHIGG: Absolutely.
If Fannie and Freddie were to stop operating, it would be disastrous for the housing economy, the American economy, and the world economy. And, so, it appears that the number-one priority of Treasury is -- as Mr. Ryan explained, is to make sure that the basic function that Freddie and Fannie provides continues, which is to buy loans from banks and other financial institutions, give them money that they can use to make new loans, and then sell -- sell those loans to investors.
And that's the overriding concern. If that stops, everything freezes up.
MARGARET WARNER: So, Steve, what will this mean to would-be home buyers and home sellers?
STEVEN PEARLSTEIN: It should mean that current prevailing mortgage rates, particularly for 30-year mortgages under $500,000, that the rates will go down.
The government's borrowing costs have actually gone down in recent months, but the mortgage rates, which usually move with it, have stayed the same. And you might see a movement down of as much as one percentage point.
MARGARET WARNER: Explain that, though. Why?
STEVEN PEARLSTEIN: Why?
Because, over the last few months, two things have happened. One, Fannie and Freddie have begun to charge more for what they have done, basically, and they have charged higher fees. But they have also bid -- bid less aggressively for the mortgages, because no one else is out there bidding. So, they -- they can afford to buy mortgages much cheaper. And that essentially raises the rate.
And then they have increased their fees. And then their cost of borrowing has gone up, because people have begun to think, oh, well, maybe we won't get paid. Even though there was this implicit guarantee, it began to fray at the edges.
And that, fundamentally, was what drove the Treasury to act, because, if people began to think that Fannie and Freddie paper was not government-backed, then the whole thing comes unwound.
Impacts on housing market
MARGARET WARNER: So, Charles, what does this mean, potentially, for the housing market? Will this have any effect on foreclosure rates or on house prices?
CHARLES DUHIGG: This won't have an effect on foreclosure rates, but what it does mean is that the housing market has restabilized a little bit, and that it will continue to be more stable going forward.
So, if you're trying to buy or sell a house, it's good for you that this has happened. And it's brought a measure of rationality and reason and predictability, most importantly, to what is happening -- to the housing economy.
On the other hand, though, the really important implication of this is for almost everyone else. In a sense, the government made a bargain four decades ago to say, we would like private investors, mainly wealthy people in foreign countries, to help provide the capital to keep the housing economy going in the U.S., instead of having to rely on the taxpayers to provide that cash.
Over the weekend, what they said was, now that we're in a crisis, it doesn't work out as well as we were hoping. And, in fact, the taxpayer has to step up and provide some of the capital, potentially, to keep that system going.
MARGARET WARNER: So, do you think this is a sea change, Steve, in the whole way that the United States essentially makes sure there is money for mortgages? Or is this a temporary stopgap?
STEVEN PEARLSTEIN: I think it's probably a temporary and a smaller change.
The basic -- the basic mechanisms by which we -- investors channel their money into the mortgage market will continue to be the same. We have -- there's a thing called Ginnie Mae, which the government runs, and it does the same thing. It buys mortgages from low-income people and -- and does the same thing.
Private firms do the same thing. J.P. Morgan and Merrill Lynch, they do the same thing. So, it's not as if there's going to be wholesale sea changes. But Fannie and Freddie were very large. And they dominated the market. And what they did in many ways was to set standards. They had very good information about what works and what doesn't. And that information helped to make the market more efficient, because they shared it.
They set up, you know, automated underwriting systems that everybody used. And, so, they helped to make our market more efficient. And what's important is that Fannie and Freddie uniquely allow us to have 30-year fixed mortgages in this country.
And the reason is, because they are perceived to be backed by the government, they can borrow money for 30 years, whereas a big -- even a big bank, like Citigroup, cannot borrow money for 30 years. And, so, that's the difference. If they go away, if they don't have the government backing, we may not have long-term fixed mortgages, the way we have them now, being very plentiful, and also being able to refinance them very easily.
MARGARET WARNER: Charles, what do you think are the potential long-term implications, as Congress and the new president wrestle with what Fannie and Freddie should look like or what this whole market should look like?
CHARLES DUHIGG: I think it's going to be an issue that we continue to talk about for at least another couple of years.
Fannie and Freddie were enormously politically powerful. And, as Steve pointed out, they had had enormous -- they have shaped enormously how the American housing economy works. Now that this has moved up to Congress and the next president, there's going to be a lot of discussion. And people who are trying to maximize their own profits and their own advantages and people who are trying to maximize the advantage for low-income and minority homeowners, and I think that we're going to see a real conversation that will manifest around trying to shape these two companies to serve different goals.
MARGARET WARNER: Finally, you saw -- you heard Secretary Ryan didn't want to take this question, but who is to blame?
STEVEN PEARLSTEIN: Well, everybody is to blame. The regulators are to blame for having allowed the housing crisis to develop, as well as people on Wall Street, who helped to develop the crisis, and the regulators are to blame really for not having reined in Fannie and Freddie at key moments, in the 1990s, when they let their balance sheet -- when they grew too much, they grew to be too big a factor in the market, unnecessarily, and, more recently, in 2005 and '6, when they, for the first time, went into some of these less conventional-type mortgages with people who didn't have as good a credit record.
They went in those because they wanted to preserve their market share and they wanted to make money. It was very profitable at the time. But that was a risk they shouldn't have been allowed to take -- also, obviously, the management of those companies for taking those extra risks.
MARGARET WARNER: All right, Steven Pearlstein, Charles Duhigg, Thank you both.
CHARLES DUHIGG: Thank you.