Freddie Mac Agrees To Limit Its Growth
Wednesday, August 2, 2006
Freddie Mac, the nation's second-largest financier of home loans, has agreed to limit its growth until it resolves bookkeeping problems that continue to plague the company three years after a $5 billion accounting scandal.
At the request of its chief regulator, the Office of Federal Housing Enterprise Oversight, the McLean company yesterday agreed not to increase its $722.21 billion of investments in mortgages and mortgage-backed securities by more than 2 percent a year, or 0.5 percent a quarter. Those holdings generate the vast majority of Freddie Mac's profit.
"We do agree we have more work we need to do with our operating systems and in addressing operating risk," chief executive Richard F. Syron said yesterday in a conference call with analysts.
The voluntary limit will expire once Freddie Mac resumes publishing regular quarterly financial reports, which it plans to do after it releases its 2006 full-year results sometime next year. Freddie Mac has not released a timely quarterly report since 2002.
Separately, the company yesterday said it estimated that its profit for the first quarter was $1.6 billion.
In an interview, OFHEO Director James B. Lockhart III said a portfolio limit was necessary "given the extent of [Freddie Mac's] problems and in particular their risk management problems."
Under the agreement with the company, the agency's director has flexibility to allow the company to grow beyond the cap to keep money flowing to home buyers. But such a situation would be the exception, Lockhart said.
"In a $700 billion portfolio, I'm sure there are some things they can sell. It would be a rare circumstance," he said.
Lockhart and Freddie Mac officials have been in talks about a possible portfolio limit for more than a month, and the news came as no surprise to most investors. The stock closed at $57.53, down 0.57 percent.
Fannie Mae, Freddie Mac's larger rival, has been operating under a similar portfolio cap since May. The District-based company has since asked OFHEO to allow it to increase its investment portfolio beyond the limit of $727.55 billion.
Freddie Mac's decision to submit to growth limits comes as lawmakers remain divided over legislation that would force the companies to shrink their portfolios.
The House in October passed a bill that would give a new regulator discretion over the size of the portfolios. In July 2005, the Senate Banking Committee approved a proposal that would restrict the types of assets the companies could hold. The full Senate has yet to vote on the measure.
Critics of Fannie Mae and Freddie Mac, including the White House, argue that the companies have grown so large that they present a "systemic risk" and threaten the stability of global financial markets. Supporters of the Senate bill have been engaged in an intense public campaign over the past several months in hopes of ending the stalemate before senators leave for August recess at the end of the week.
But they have yet to overcome concerns among Senate Democrats who have criticized the bill, saying it would have a "significant impact on the mission of the enterprises and cause damage to affordable housing markets."
Lockhart, who thinks the companies' portfolios are too big, has said the Senate bill provides better guidance but needs to provide more flexibility on the portfolios.
Despite having managed to get both companies to operate under growth limits, Lockhart said legislation is necessary because his agency still lacks the power it needs to properly oversee the two companies.
"We had to do this in a voluntary way. We could've imposed the limit, but it would have ended up in court," he said, referring to yesterday's agreement with Freddie Mac. "This limit is only related to the operational problems they need to fix. . . . We need more powers to look at the size of their portfolio, which I think presents operational and systemic risk."