More mort­gage mis­ery: Fred­die Mac loss ‘shock’ to econ­omy

The Washington Times Weekly - - National - By Pa­trice Hill

One of the last sanc­tu­ar­ies in the mort­gage mar­ket was threat­ened Nov. 20 as Fred­die Mac re­vealed big losses that might force it to con­serve cap­i­tal and cut back on pur­chases of mort­gage loans.

The de­vel­op­ment, com­ing a day af­ter Fan­nie Mae re­ported sim­i­lar fi­nan­cial strains, oc­curs at a time when Fan­nie’s and Fred­die’s con­form­ing loans have be­come just about the only game in town for home buy­ers as the private mar­ket for mort­gage se­cu­ri­ties has all but dried up.

The prob­lems at the mort­gage gi­ants threaten the high­est-qual­ity loans — not just the subprime mar­ket.

The $2 bil­lion in third-quar­ter losses an­nounced by Fred­die Mac are an “ad­verse shock” to the econ­omy of the kind that could force the Fed­eral Re­serve to cut in­ter­est rates again to pre­vent the spread­ing credit crunch from pulling the econ­omy into re­ces­sion, said Harm Band­holz, econ­o­mist at Unicredit Mar­kets.

Even be­fore the threat to prime loans emerged, new con­struc­tion on sin­gle-fam­ily homes last month plum­meted 7.3 per­cent to lev­els not seen since the deep hous­ing re­ces­sion of 1991, the Com­merce De­part­ment re­ported. Hous­ing con­struc­tion and per­mits are down nearly 50 per­cent from their peaks in Septem­ber 2005, and economists say the credit crunch will send them tum­bling fur­ther.

“This is a very, very dif­fi­cult time. This is not happy news,” said Richard Sy­ron, Fred­die Mac’s chair­man and chief ex­ec­u­tive of­fi­cer, in a con­fer­ence call with Wall Street an­a­lysts. “We will work through this.”

Fred­die said it set aside $1.2 bil­lion to cover losses on de­fault- ing loans, and it is try­ing to avoid hav­ing to set aside more re­serves — a move that would force the mort­gage agency to cut back on loan pur­chases from banks. It has hired Gold­man Sachs and Lehman Brothers to come up with creative ways of rais­ing cap­i­tal.

Fred­die’s pos­i­tive spin failed to pre­vent its stock from plum­met­ing nearly 30 per­cent, its big­gest loss in two decades. Fan­nie Mae stock was not far be­hind, drop­ping 25 per­cent in value.

Fred­die Mac’s prob­lems threaten many other com­pa­nies and banks pro­vid­ing mort­gages.

The stock of Coun­try­wide Fi­nan­cial Corp., which ear­lier this sum­mer saved it­self from bank­ruptcy by declar­ing it would make only con­form­ing loans that could be bought by Fan­nie and Fred­die, re­treated as much as 22 per­cent Nov. 20 on fears that it will not be able to sell its loans and be forced into de­fault. Af­ter the com­pany de­nied the ru­mors, its stock re­cov­ered to end the day with a 2.7 per­cent loss.

The con­straints con­fronting Fan­nie Mae and Fred­die Mac are sim­i­lar to those plagu­ing banks and sav­ings and loans faced with spi­ral­ing losses that are forc­ing them to cut back on mort­gage lend­ing. Amid ris­ing de­faults among their port­fo­lios of loans and mort­gage­backed se­cu­ri­ties, all of the lend­ing in­sti­tu­tions are forced to set aside re­serves to cover losses — leav­ing them with less money to lend.

The Of­fice of Thrift Su­per­vi­sion said that trou­bled loans have nearly dou­bled to $18.7 bil­lion at the na­tion’s thrifts in the past year, forc­ing them to quadru­ple their re­serves. The gov­ern­ment agency said losses have been con­cen­trated among large in­sti­tu­tions like Wash­ing­ton Mu­tual Inc., which sold their loans to in­vestors, rather than smaller in­sti­tu­tions that made bet­ter-qual­ity loans and kept them in their own port­fo­lios.

With losses es­ca­lat­ing on prime as well as subprime loans, lenders are be­com­ing more con­ser­va­tive. They not only are re­ject­ing loan re­quests from mar­ginal bor­row­ers, they are im­pos­ing stricter re­quire­ments on prime bor­row­ers. Some bor­row­ers are mak­ing larger down pay­ments to get loans.

A Fed sur­vey ear­lier this month found that more than 40 per­cent of banks have tight­ened their lend­ing stan­dards for prime bor­row­ers, and more than 60 per­cent have cut back on loans to subprime bor­row­ers. Loans with loose terms like no down pay­ments and low teaser in­ter­est rates — freely avail­able six months ago — are all but gone to­day.

Bloomberg News

If you build it, will they come? Charles Lee cuts wood for a Toll Brothers home un­der con­struc­tion in Cary, North Carolina on Nov. 20. Home­build­ing per­mits in the U.S. have slumped to their low­est level since 1993 and con­struc­tion of sin­gle-fam­ily homes has tum­bled, in­di­cat­ing the hous­ing in­dus­try has yet to reach bot­tom.

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