New Fannie, Freddie Head Discusses Takeover
MELISSA BLOCK, host:
Fannie Mae and Freddie Mac will now be overseen by a conservator, the Federal Housing Finance Agency, or FHFA. James Lockhart is the director of the FHFA, and he says it's unclear just how long the government will have to maintain control of Fannie and Freddie.
Mr. JAMES LOCKHART (Director, Federal Housing Finance Agency): We're hoping that this move will cause mortgage rates to come down. There will be more credit available for mortgages. We're starting to see that already. So that's good. But it's going to take a while. And we would hope at some time in the future to attract investors.
BLOCK: When you say it would take a while, give me some sense of what you mean by that.
Mr. LOCKHART: Well, at this point the two companies' capital position is weak. They have over $5 trillion of mortgages, and obviously there - you know, there's risk in those mortgages. So we have to work through what the credit issues are there. And we also probably have to wait for some recovery in the housing market.
BLOCK: Back in March, Mr. Lockhart, you said that the idea of a bailout of Fannie and Freddie was, in your words, nonsense. You said the companies are safe and sound, and they will continue to be safe and sound. How do you explain that just six months later, here we are with the government seizing control of both?
Mr. LOCKHART: Well, first of all, I don't really consider it a bailout because the common and preferred shareholders have suffered. A lot of things have happened over the last six months, and that is a reason that the situation has changed. The markets are continuing to deteriorate. Certainly, there were issues about their ability to borrow. And the risk in the marketplace just continued to increase.
BLOCK: Looking back now, how do you account for the fact that things got this bad? And were you remiss in some ways, the regulator, to let things get to this point where there is now this takeover?
Mr. LOCKHART: Well, it's a good question. And I think the key issue really was that we have an antiquated law that allowed these companies to be extremely leveraged. We actually put an extra capital requirement on them because of their problems in the past, and we kept that on. And we also froze their portfolios. So we actually helped prevent a much more serious situation. But, yes, I think I said that we did not have all the tools that a bank regulator had. And that has come home to roost now. The good news is Congress did pass a bill at the end of July that gives us more powers. And of course, the idea that the Treasury could help out in this situation is extremely important.
BLOCK: In your statement yesterday, when the seizure was announced, you talked about the inherent conflict and flawed business model that's embedded in the structure of Fannie Mae and Freddie Mac. What do you mean by that? What's the conflict?
Mr. LOCKHART: It really is the law - the regulations and the law that set them up to allow them to have a very thin capital structure. You know, the idea that they could take a lot of risk in hopes of getting high returns for their stockholders created a conflict. They were allowed to borrow a lot more under the law than any other financial institution. And because of their government-sponsored enterprise status, they had a triple-A even though their balance sheet was getting weaker and weaker.
BLOCK: Do you think there is something fundamentally - inherently conflicted about the hybrid model that Fannie and Freddie have been, these government-supported enterprises?
Mr. LOCKHART: Well, I think it has to be reviewed at this point. And I've heard from senators and congressmen that it's something that they're going to have to look at.
BLOCK: One of the things that's been talked about - certainly, by some on the Republican side - is privatize Fannie and Freddie. They shouldn't be government-supported.
Mr. LOCKHART: Well, I think there's a full range of alternatives here going forward. And it could be privatization. It could be a much stronger GSE model with much higher standards. Or, you know, some people have actually even talked about nationalization, which I don't think is the right solution.
BLOCK: GSEs are government-sponsored enterprises.
Mr. LOCKHART: Exactly.
BLOCK: So you don't think nationalization is the right solution. Do you think privatization could be something you would support?
Mr. LOCKHART: Well, I think it's an alternative. It has to be looked at, you know. And nationalization should be looked at as well. But, you know, my personal view is there should be a way to get them back into the private sector.
BLOCK: What do you think the price tag for this takeover is? One number that's been floated is $25 billion. Do you think that's about right? Do you think that's too low?
Mr. LOCKHART: Well, it's hard to say that there will even be a price tag at this point. The U.S. government has gotten a preferred stock of a billion dollars, has warrants of almost 80 percent. You know, we'll be buying mortgage-backed securities that should be very strong. So, there may be money put in, but over the long term, you know, the hope would be that it would be repaid.
BLOCK: What's your message to Fannie and Freddie stockholders who've now seen their dividend payments eliminated, and they also own a far smaller stake in the companies now. Their shares have been diluted. What do you say to them?
Mr. LOCKHART: Well, you know, what I say to them is that as a common stockholder, you do take some risk. It's very unfortunate that it came to this. But what happened here is the companies, with that flawed model we were talking about before, took on too much risk for very little return and unfortunately, that came home to roost.
BLOCK: Is it wrenching for you, in any way, to see this happen?
Mr. LOCKHART: Well, yeah. I mean, it's not a happy day. But you know, I think we had to make the right decision for the country. And the right decision for the country and the financial markets was to do this.
BLOCK: James Lockhart, thanks for talking with us.
Mr. LOCKHART: Thank you.
BLOCK: James Lockhart is the director of the Federal Housing Finance Agency, the conservator overseeing Fannie Mae and Freddie Mac.