Mortgage Giants' Mess Falls to Their Regulator
Thursday, September 11, 2008
With the government's seizure of Fannie Mae and Freddie Mac on Sunday, the federal regulator who oversaw the mortgage giants during their long descent is now in charge of restoring them to financial health.
In the months before the takeover, James B. Lockhart III repeatedly assured investors that the mortgage giants were financially sound. In March, he even called fears about a government bailout "nonsense" as he reduced the financial cushion they were required to maintain.
He eventually came to a different conclusion, deciding the companies were in perilous shape and would pose a major risk to financial markets if the government did not intervene.
In an interview, Lockhart said he was "obviously wrong" about his assessment in March. As the director of the newly created Federal Housing Finance Agency (FHFA), he now finds himself in full control of the companies and facing many of the same challenges that brought Fannie Mae and Freddie Mac down -- along with a few new ones.
Fannie Mae and Freddie Mac were chartered by the government to keep money flowing to the mortgage market, but they also had a duty to shareholders to maximize profits. Lockhart said it is now Fannie Mae and Freddie Mac's first priority to support the battered mortgage market, which he said might include loosening standards for mortgages the companies fund. The companies had pulled back on more risky lending when the housing market collapsed.
"They may look at targeted changes that might allow more people to get more mortgages," Lockhart said. If the companies' losses mount, "we know the U.S. government will be there" to cover them, he said.
Lockhart also must find new incentives for employees who have watched the value of their Fannie Mae and Freddie Mac stock fall more than 98 percent over the past year and may be tempted to look elsewhere.
Lockhart said he would seek to retain employees, potentially offering special bonuses. "I want to make sure there is an incentive for these people to stay," he said.
Lockhart said he would work with the new chief executives he appointed to run the companies.
Richard S. Carnell, a law professor at Fordham University and a former senior Treasury official, said there was a "tension" between Lockhart's goals of providing a boost to the mortgage markets and maintaining the companies' health.
"They got into problems by guaranteeing mortgages where the credit quality of the loans was too weak," he said. "The more careful they are [in expanding lending], the more it constrains the macroeconomic and housing market goals."
Lockhart faces other sensitive questions. He must decide whether to write off tens of billions of dollars of troubled assets on the companies' books, potentially increasing the near-term cost of the government bailout, or whether to defer the reckoning.