Tuesday, January 8, 2008

Housing Slump to Continue: Fannie CEO

Voltron Says: I still predict housing will not begin to recover until 2011.

Associated Press
Tuesday January 8, 4:49 pm ET
By Marcy Gordon, AP Business Writer
Housing Market Will Continue to Weaken and Sap Strength From Economy, Fannie Mae Chief Says

WASHINGTON (AP) -- The CEO of Fannie Mae, the largest financer and guarantor of U.S. home loans, predicted on Tuesday that the housing market downturn is likely to persist into 2010.

To blunt the broader economic impact, Fannie President and CEO Daniel Mudd, speaking at an event hosted by the U.S. Chamber of Commerce, urged lawmakers and lenders to pursue "the most generous means possible" to help out borrowers facing sharply higher mortgage payments in the next few years. But Mudd voiced only qualified support for a new plan orchestrated by the Bush administration that would help borrowers with weak credit whose mortgages are resetting to higher costs with a five-year freeze of interest rates.

Losses to investors from reworked loan contracts could reduce the available credit for mortgage securities and reverberate on Fannie and its smaller government-sponsored sibling, Freddie Mac, which buy up home loans made by banks and other lenders and then bundle them as securities for sale to investors worldwide.

Washington-based Fannie Mae, which lost $1.4 billion in last year's volatile third quarter, expects to lose money this year on eight to 10 of every 1,000 mortgages held on its $2.4 trillion book -- a steep increase from four to six in 2007.

Mudd's comments came the same day as Treasury Secretary Henry Paulson said the administration was exploring a possible expansion of the program to include stronger borrowers. Such an expanded plan to cover homeowners with conventional mortgages would more directly affect Fannie Mae and Freddie Mac, which have a relatively small exposure to high-priced subprime mortgages but stand behind hundreds of billions of dollars of conventional loans.

Shares of Fannie and Freddie slumped Tuesday as Countrywide Financial Corp., the nation's largest mortgage lender, released a statement denying rumors that it would soon file for bankruptcy.

Fannie Mae's stock fell $2.60, or 7.6 percent, to $31.63, while Freddie Mac shares declined by $2.40, or 8.2 percent, to $26.76. Both Fannie and Freddie are major buyers of loans made by Countrywide.

Smaller drops were seen among other lenders such as Wells Fargo & Co. and Bank of America Corp., while shares of Countrywide fell $2.17, or 28.4 percent, to $5.47.

Mudd said in his speech that the Bush mortgage rate-freeze plan was "an important step," but he also warned that "altering basic contracts would have a high price," in particular by breaching the legal rights of the investors holding mortgage-backed securities.

"Investors left with the losses would not easily return to the market," Mudd said. "That inevitably would shrink the pool of credit."

Meanwhile, Mudd told the business audience that the health of corporate America this year will depend on "how we get through the toughest housing correction in our lifetimes."

He reaffirmed the prediction made recently by Fannie Mae that American home prices will fall by 10 percent to 12 percent from their 2005 peak before the housing market can rebound, likely in 2010.

Fallout from the slump has forced Fannie Mae and Freddie Mac to set aside billions of extra dollars to account for bad home loans, eroding their profits at a time when home prices are falling and foreclosures are spiking on high-risk mortgages made to borrowers with weak credit histories.

Last month, the two companies sliced their dividends and sold billions of dollars of special stock to raise capital and shore up their finances.

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