Friday, November 23, 2007
NO ONE can say how or when the subprime mortgage crisis will end. But the next act will not -- or at least should not -- include Fannie Mae and Freddie Mac riding to the housing market's rescue. That became clear Tuesday when Freddie reported an all-time record quarterly loss of $2 billion, just 11 days after Fannie Mae reported a $1.4 billion loss. It would be nice if the two government-sponsored enterprises (GSEs), which back $4.8 trillion worth of home loans, could help prop up home prices and hold down interest rates. But their own safety and soundness come first.
This is not what leading Democrats in Congress have been saying since the subprime crisis began. Searching, understandably, for a fresh source of short-term liquidity, they have suggested such measures as authorizing Fannie and Freddie to "securitize" larger loans in high-cost housing markets and lifting the limits on their total portfolios that federal regulators imposed after accounting scandals at the two companies. Sen. Charles E. Schumer (D-N.Y.) continues to make that argument. "It should come as no surprise that Fannie and Freddie's businesses have been negatively impacted," he said. That "does nothing to lessen the critical role that the GSEs must play in providing much-needed liquidity to a struggling market."
A Fannie-Freddie rescue always seemed unwise to us, in part because it would address the crisis by boosting home prices generally rather than delivering relief targeted to those borrowers who need it most. It also didn't seem terribly feasible, given what federal regulators require as a ratio of the companies' core capital to the value of loans they own or guarantee. To be sure, the ratio is now higher than the law requires, but the two firms accepted that as part of settling their accounting scandals. Freddie Mac's capital is just $600 million above the $34 billion minimum required by the Office of Federal Housing Enterprise Oversight -- its lowest capital surplus since 2000. Perhaps portfolio limits could safely be lifted if Freddie and Fannie raised more capital, as both are trying to do. But their stock prices are plunging.
The losses at Freddie Mac and Fannie Mae show that not even the GSEs, which specialize in securitizing and selling high-quality mortgages, are immune to the rot spreading from the subprime market. They also show just how uncertain the overall credit situation still is. Freddie's quarterly loss of $3.29 per share was more than 10 times what analysts had forecast. This is no time to pile new risks on top of those -- known and unknown -- that Fannie and Freddie already bear.