Assembling America's Mortgage Team

Regulator and Two New Chiefs Triage Together Through Transition

Retired and on his first family vacation in years, Herbert M. Allison Jr. sat with his wife and adult sons eating lunch on a veranda in the Virgin Islands when an urgent caller rang with a confidential inquiry.

It was Treasury Secretary Henry M. Paulson Jr. The government was preparing to seize struggling mortgage finance giants Fannie Mae and Freddie Mac. Would Allison, a former chairman of TIAA-CREF, consider leading one of them? "He outlined the seriousness of the situation, and over the phone I told him I'd do whatever he wanted," Allison said.

The next day, Friday, Sept. 5, Allison boarded a water-taxi to the airport, got on a plane, landed in Washington, and with a rucksack and his tropical attire, arrived on the steps of the Treasury Department. He was quickly chosen to be Fannie Mae's new chief executive. The announcement of the takeover would come on Sunday and he would start Monday.

In the month since the government seized the companies, Allison has joined new Freddie Mac chief executive David Moffett, a former U.S. Bancorp chief financial officer, and James B. Lockhart III, the regulator who hired both men and oversees their operations, in forging the team charged with an ambitious mission: Stabilizing the nation's ailing mortgage market and lowering borrowing costs for everyday Americans.

Intense Pressure

The three men inherit companies that have been under heavy stress -- first with accounting scandals, then with the sharp downturn in the housing market that caused massive losses and forced the government to intervene. Morale is low, and employees are asking questions such as: Do I work for a government agency or a private company? Do I have a long-term future here, or is the era over when you could join Fannie Mae or Freddie Mac, earn a steady living and do good things for the nation's housing market?

District-based Fannie Mae and Freddie Mac of McLean -- congressionally chartered public companies -- have always wrestled with conflicting ideological and commercial mandates. Some lawmakers blame them for the nation's ills, even as policymakers including Paulson and President Bush press them to buy more mortgages to support the market. Others want the firms to do more to help people avoid foreclosures and continue to support low-income housing -- all without saddling taxpayers with greater costs.

Lockhart, Allison and Moffett's relationship will guide how well the firms are able to accomplish this.

Fannie Mae and Freddie Mac help provide liquidity to the mortgage markets by buying and guaranteeing loans and packaging them into securities that can be sold to investors. This activity helps free lenders to make more loans and keep the mortgage machinery well-oiled.

In recent days, the new chief executives have been working toward fulfilling a government goal of boosting purchases of mortgages by up to $20 billion a month. Allison and Moffett have been on the phone with mortgage executives at the largest banks, letting them know that Fannie Mae and Freddie Mac are willing to buy back mortgage securities if it would help ease stressed balance sheets.

The companies are looking at other ways to help lenders. Before the federal takeover, Fannie Mae and Freddie Mac had to raise prices on loans so that the additional profits could offset losses from toxic assets in the companies' portfolios. Those higher prices would be passed on to borrowers. Lockhart, director of the newly created Federal Housing Finance Agency, told Allison and Moffett that they no longer had to worry about pricing those costs in; the government has created a program to provide capital to the companies if losses mount. The companies have since canceled scheduled increases in mortgage fees.

"Do they have to make up for all the losses from previous years by really inflating the margins on the new business?" Lockhart said. "The answer to me is no."