Chief Says Freddie Won't Raise Capital
Thursday, March 13, 2008
Freddie Mac, the giant mortgage-funding company, sent a fresh signal yesterday that it won't compromise the interests of its shareholders to increase its capacity to help the troubled housing market by buying or guaranteeing mortgages.
During the meltdown of the housing and mortgage markets, many policymakers have been hoping Freddie Mac and its federally sponsored sibling Fannie Mae will lead the rescue.
But while McLean-based Freddie Mac may be government chartered, it is also a public company. It is perennially torn by competing demands, such as keeping mortgage markets healthy, promoting homeownership for low-income families and generating profit for its shareholders.
At a briefing for investors and stock analysts in New York, chief executive Richard F. Syron cited management's fiduciary responsibilities in suggesting that Freddie Mac will put shareholders first and resist pressure to raise more capital.
Freddie Mac's capacity to buy or guarantee mortgages and thereby pick up slack in the weakened market is proportional to the amount of capital it holds as a cushion against losses. Raising additional capital -- for example, by issuing more stock -- could increase that capacity, but it could harm current shareholders.
Chief financial officer Anthony S. Piszel made the point repeatedly for emphasis, using the jargon of Wall Street: "There is no dilutive capital raise planned."
"We think we have enough," Syron said.
Syron also implied that Freddie Mac will not attach a high priority to meeting federal quotas that call for it to fund mortgages for low-income home buyers and neighborhoods.
"It is not good public policy to have mission goals that encourage [Freddie Mac and Fannie Mae] to put people in homes that they end up losing," he said. "We have to do things that make sense and will help the economy of the United States," not hurt it pursuing "what could be unrealistic goals," Syron said.
Syron said "crisis" is the right word to describe current market conditions.
"It's not incorrect to say we're in a 100-year storm in the housing finance industry, and we have to treat it as such," Syron said.
Freddie Mac and Fannie Mae, based in the District, package mortgages into securities for sale to investors, guaranteeing to pay the principal and interest if the borrowers default. That enables lenders to move mortgages off their books and replenish the funds they use to issue new mortgages.
Recently, investors were selling off mortgage-backed securities issued by the two finance giants -- in addition to less-marketable mortgage-related securities issued by others -- to raise cash. The Federal Reserve stepped in Monday, offering financial institutions the option of using such mortgage-backed securities as collateral for up to $200 billion of 28-day loans.
At yesterday's briefing, Freddie Mac chief business officer Patricia L. Cook said that the Fed's action was "a short-term help" but that "it doesn't solve the long-term problem," which is getting the mortgages in the hands of buyers interested in holding them.
"The longer-term issue is where do those mortgages ultimately end up," she said.