Freddie Mac Chief Sees Tough Times Ahead

Staff writer David S. Hilzenrath filed this dispatch from his interview with Freddie Mac CEO Richard F. Syron:

The head of Freddie Mac has a bearish outlook for the housing market.

"I think on a national level the whole housing market has another year and a half of tough times ahead of it," Richard F. Syron, chairman and chief executive of the government-sponsored mortgage funding company, said in an interview Wednesday.

"I think it will get materially more severe," he said. "I think we'll probably see in real terms . . . housing prices will go down."

Freddie Mac CEO Richard F. Syron

Syron, who has a doctorate in economics and once worked for Paul Volcker at the Federal Reserve, brings a special perspective to the topic: McLean-based Freddie Mac has about $712 billion of mortgage-related investments.

Freddie Mac is relatively insulated from the so-called subprime segment of the mortgage market in which many lenders have imploded, but it has funded unconventional loans such as those for which borrowers pay only interest for a time instead of paying down principal.

At the margins, problems have been creeping from the weaker segments of the market into the stronger ones, Syron said.

Syron said homeowners with steady incomes have many reasons to hold onto their houses even the real estate ends up being worth less than the mortgage.

Nonetheless, in the interview yesterday, Syron said a decline in home prices could have economic ripple effects.

"It will have, not catastrophic, but it will have a measurable impact on how people spend money. It will have a material impact on how people spend on cars, how they spend on consumer appliances, how they spend on lots of things."

Many household purchases are related to housing, and others are affected by the amount of equity people believe they have in their homes, Syron said.

"When they feel they're less rich, they're inclined to spend less money on discretionary items, which is inclined to have more of an effect on the economy as a whole," Syron said.

So far, there's no sign of calamity in the overall mortgage delinquency rates Freddie Mac reports. The percentage of Freddie Mac's single-family mortgages delinquent by 90 days or more was 0.49 percent in May, down from 0.54 percent in January.

However, Freddie Mac said last month that, based on an index the company compiles, seven states experienced price declines during the first quarter of 2007: California, Florida, Massachusetts, Michigan, New Hampshire, Nevada and West Virginia. In addition, Freddie Mac said, among large metropolitan areas, Boston, Detroit and San Francisco showed annual declines in home values.

By Dan Beyers  |  July 25, 2007; 7:16 PM ET  | Category:  Freddie Mac
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I like these guys that never predict bad news until its already happened and cannot be denied. Its like they think that by talking about it, will make it happen.

Posted by: Harold F | July 25, 2007 10:56 PM

Well, our government has been such a big help in Katrina, and making the world a safer place I'm sure as our economy implodes we can all expect a helping hand from the Bushies.

Posted by: Anonymous | July 26, 2007 12:24 PM

the GSEs are toast. they hold so much subprime and alt-A mortgage (toilet) paper that not even the implicit guarantee of a FedGov bailout (i.e. taxpayer bailout) will stop this train from derailing. even China knows this which was obvious after they just sent HUD's Jackson back home w/o a signed MOU to buy GNMA and FNMA MBSs.

apparently Syron didn't get the memo from Paulson who just said, "Now when our economy is in a position of strength..." so a position of strength is being the catalyst of a collapsing global liquidity bubble? interesting.

Posted by: millionea7 | July 26, 2007 12:28 PM

I wouldn't want this guy driving me around, he obviously doesn't use a rear view mirror and ignores signs of traffic hazards ahead.

Posted by: Anonymous | July 26, 2007 3:15 PM

you know nothing of what you speak. the amount of Alt. A and subprime product that the GSEs hold is minimal compared to the amount of A paper in their books. and before your write the GSE's epitaph, remember that they have been through worse markets than this and have thrived despite house price depreciation (california in 80 and early 90s, new england, oil patch, etc).

Posted by: to millionea7 | July 26, 2007 9:11 PM

the punchline to that joke is that their "A" paper isn't really "A" paper, otherwise they wouldn't be experiencing the rise in defaults (not to mention Moody's, S&P, and Fitch were asleep for the last 6 years). just b/c they can only take on conforming loans won't help them either when that limit is set at a high 417K. what's that line from Tommy Boy about a guarantee being only as good as the glue-sniffing elf (or credit-rating agency) that writes it... if you want me to crap in a bag and stamp "guaranteed" on it, i will.

Posted by: millionea7 | July 26, 2007 10:30 PM

The number of people who can buy a $300,000 home using conventional financing ($60,000 down, PITI of $2,200/mo.) is much less than the number of $300,000 homes on the market. The housing market is quite simple - prices are function of people's income and the type of financing that is available. Incomes are flat, and monkey-shines financing is no longer offered. So obviously, the housing crash will be over when all of the $300,000 homes cost $150,000 and people can start buying again.

Posted by: George C | July 26, 2007 10:44 PM

i guess if defaults are 0, and then increase to 0.5%, i suppose you could consider that a "rise". then again, if you had knowledge of the industry, you would say that we have been fortunate to have had a great run of home price appreciation and low rates and now we are heading into a more "normal" environment.

Posted by: to millionea7 | July 27, 2007 8:44 AM

is this industry a black box of revenue (similar to Enron)? here's what i know: 1) their mammoth portfolio is full of over-rated crap that is being marked down to market... and that's the bright side of their business, 2) flat yield curve squeezing their lend/borrow operation, 3) they're taking heavy losses in their derivative product suite which also went from $275 million profit this time last year to a $500 million LOSS.

the "normal" market is going to crush them. they swung from a $2 BILLION dollar profit this time last year to a $200 million dollar LOSS in Q1 and we are maybe in the middle innings of this debacle.

and here's a recent quote from Syron:

"I'm particularly proud that our company took a leadership role in the subprime mortgage market, announcing new underwriting standards and products and committing to purchase up to $20 billion in mortgages to support subprime borrowers."

brilliant move, Syron.

the one plus to Freddie is that their reporting has caught up to where they should be so now we get to watch them implode on a quarterly basis :-)

Posted by: millionea7 | July 27, 2007 11:15 AM

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