Modifying the Mortgage Giants
Monday, December 8, 2008
After the government announced last month that Fannie Mae and Freddie Mac would take new steps to modify tens of thousands of mortgages to make them more affordable, some executives expressed concerns that the moves could weaken their already struggling companies.
Fannie Mae's chief executive, Herbert M. Allison Jr., acknowledged these fears in a staffwide message. "As we take further steps to aid homeowners, some employees are asking about the potential cost to the company of modifying loans to help distressed borrowers," he wrote. "Our challenge is to keep families in their homes and support the mortgage markets."
In the long-running contest between profits and public policy at Fannie and Freddie, public policy is winning.
Fannie and Freddie have always had to strike a balance between the imperative of profit-maximizing, shareholder-owned institutions and the public mission of firms charged with ensuring affordable housing. But since the government seized the firms in early September, the balance has shifted.
"We're tilting toward the public mission of the company to safeguard homeowners," Allison said in an interview.
Last week, sources said the Treasury Department was strongly considering a plan to use Fannie Mae and Freddie Mac to dramatically force down what Americans pay for home loans. The plan would require that Fannie and Freddie buy 30-year, fixed-rate mortgages if they have a 4.5 percent interest rate, the lowest in history. In turn, the Treasury would purchase these loans from the companies.
Allison, Freddie chief executive David M. Moffett and the federal regulator who hired them, James B. Lockhart III, must walk a fine line. Taking steps to support the housing market and help borrowers could cost the firms, depriving them of revenue and forcing them to assume even riskier investments. And the Treasury has put taxpayer money on the line for up to $200 billion in losses at the companies.
But doing too little could delay a housing recovery as more homes fall into foreclosure and people have trouble getting home loans. That could also hurt the bottom line. "If housing prices continue to fall, losses will mount at Fannie and Freddie," Lockhart said. "There's no doubt that the sooner we can get stability to the mortgage market, the better off they will be."
There are other questions -- for instance whether the companies will eventually resume their traditional rivalry as private enterprises or remain under government control indefinitely. The unusual hybrid nature of Fannie Mae and Freddie Mac dates back 40 years when they were chartered by Congress to supply financing to the mortgage market and support affordable housing.
With the government still insisting that the firms pursue both a public policy agenda and profitability, executives have yet to resolve how far they should tilt toward the former. Using identical language, the companies said in recent financial disclosures that the various goals "create conflicts in strategic and day-to-day decision making that will likely lead to less than optimal outcomes for one or more, or possibly all, of these objectives."
In the past three months, Fannie and Freddie have announced they are modifying tens of thousands of mortgages, suspending foreclosures and evictions during the holiday season, canceling fees to back home loans and expanding their purchases of mortgages and mortgage-backed securities.
The moves are in part a reversal of what Fannie and Freddie were doing before being taken over. This summer, the companies were raising fees and buying fewer mortgages with the goal of conserving cash and building up their financial cushion to withstand billions in losses in the mortgage market meltdown.