On Wall St., Mortgage-Finance Chiefs Take Apologetic Tone
Wednesday, December 12, 2007
The chief executives for two of the nation's dominant mortgage-finance companies traveled to Wall Street yesterday and delivered competing words of regret for having to take painful steps to shore up their businesses.
The two government-chartered firms recently cut the dividends they pay shareholders and borrowed billions of dollars of relatively costly capital to stay in compliance with regulatory requirements and ride out the turmoil in the housing market.
"We wanted to dilute the common shareholders like we wanted to shoot ourselves in the head with a gun," Richard F. Syron, Freddie Mac chairman and chief executive, told a gathering of investment analysts.
"I wanted to cut off both my arms, and both my legs, and my head and my kidney," Fannie Mae chief executive Daniel H. Mudd said later in the day.
Investors have punished the companies' stocks recently, and yesterday's presentations by the two executives at a Goldman Sachs conference did not appear to help. Freddie Mac's share price fell 10.6 percent, and Fannie Mae's fell 7.1 percent. Both stocks are down more than 50 percent from their high points over the past year.
Syron and Mudd forecast continued declines in home prices. Syron predicted home prices would ultimately bottom out at an average of 10 percent below their peaks, and Mudd predicted average peak-to-trough declines of 10 to 12 percent nationally.
But Syron outdid Mudd in expressing remorse for past business decisions and in describing the trouble that may lie ahead.
Although many foreclosure notices have been issued, the public hasn't seen a lot of forced evictions or pictures of people standing in front of their houses with their furniture on the lawn, Syron said. When that happens, the effect on consumer confidence could inflict deeper damage on the economy, Syron said.
If home prices decline by 30 percent, as one noted economist has said could happen, "We're all going long apples and boxes to sell them in," Syron said, invoking an image from the Great Depression.
Syron traced the trouble in the mortgage business to a housing bubble and accepted some responsibility.
Fannie Mae and Freddie Mac contributed to the problem by spreading the message that everybody should own a house, he said. In fact, many people who should not have owned houses bought them, he said. Next year, the nation will have to come to terms with the big political challenge of converting much of that real estate into rental housing, Syron said.
Referring to recent financial results that shook confidence in the company, Syron said Freddie Mac reported "really ugly numbers."
One questioner accused Syron of making a strategic error in failing to adjust to clear signs of looming trouble as early as 2005.
Syron agreed that Freddie Mac should have tightened its lending standards sooner. Although Freddie Mac was an early bear about the real estate market, he said, it did not foresee the severity of the problem.
Early this year, Freddie Mac faced a "crucial turning point" when it was "dancing on the edge," he said. Instead of retreating into "fortress Freddie," the company opted to raise additional capital, he said.
In the future, Freddie Mac can save money "through attrition and managing our workforce better," Chief Financial Officer Anthony S. "Buddy" Piszel said.
Syron and Mudd said their firms are poised to benefit from the shakeout in the mortgage industry by gaining market share and raising the fees they charge lenders for guaranteeing mortgages.