The sudden death — an apparent suicide — of Freddie Mac’s acting chief financial officer David Kellermann is the latest shock to ripple through the federally backed housing agency. Since essentially being taken over by the government in September, it has been one hit after another for Freddie Mac — a private company that, with sister-agency Fannie Mae, holds or guarantees more than half of all U.S. residential mortgages and finances some 70% of new-home loans, and which the Obama Administration counts on as a cornerstone in its plans to revive the housing market.
Though the home-ownership-promoting policies of Fannie and Freddie are often held up as major contributors to the housing bubble and ensuing financial crisis, the two agencies actually backed and held a fairly small portion of subprime and otherwise risky loans.
Make no mistake: the agencies have taken major losses. In March, Freddie reported a $50 billion loss for 2008, nearly half of which came in the fourth quarter. Those losses, Freddie says, were driven largely by rising mortgage defaults and the falling value of derivatives used to protect against things like changes in interest rates.
But the starker reality is that the sorts of loans Freddie and Fannie tend to hold — the better ones — are only now starting to really run into trouble. In February, 2.13% of single-family mortgages at Freddie were delinquent. That was up from 1.98% the month before, and up from 0.74% a year ago. As the economy stagnates and unemployment rises, Freddie and Fannie loans are at risk in a way they weren’t when the primary issues were things like interest-rate resets and loans having been made to people who couldn’t afford them in the first place. The research firm CreditSights has said it thinks the delinquency rate at Freddie could go as high as 4% in coming years.
Compounding that problem, from a businessman’s point of view, is the way the Obama Administration treats Fannie and Freddie as part of the federal government. James Lockhart, the director of their new overseer, the Federal Housing Finance Agency, has said they are to act as an “arm” of the Treasury Department — even though they are still, technically, for-profit, publicly traded companies. From a moratorium on foreclosures to a program to purchase and guarantee home loans for more than what the houses are worth, the agencies have taken steps that are greatly influenced by the goals of policy makers, however justified.
Political influence is by no means a new story at the housing agencies, but nonetheless one that is currently having a material influence on the people tasked with steering them back to financial health. When Freddie Mac’s CEO resigned in March, press reports pegged part of the cause to his frustration over how all major decisions had to be run past regulators and how those decisions were often dictated by policy goals and not what was best for the company. Freddie Mac executives have estimated that this year it will cost the firm $30 billion to carry out the Obama Administration’s housing plans, which, they wrote in a regulatory filing, “are likely to have a significant adverse effect on our financial results or condition.”
Now overlay that with the fairly constant vilification of the agencies by politicians and the media. When word got out earlier this month that Fannie and Freddie were planning on paying out some $210 million in retention bonuses to 7,600 employers over the course of 18 months, lawmakers went haywire . “It’s hard to see any common sense in management decisions that award hundreds of millions in bonuses when their organizations lost more than $100 billion in a year,” Senator Charles Grassley said in a statement. Barney Frank, chair of the House Financial Services committee, wrote to Lockhart: “I am writing to urge strongly that you rescind the retention bonus programs at Fannie Mae and Freddie Mac.” Never mind all that Congress and the President have asked of the agencies. Or the fact that morale at the agencies is horrible and plenty of their most-talented workers — i.e., those that can easily get hired elsewhere — are leaving. Freddie Mac doesn’t have a permanent chief executive, chief operating officer, or chief financial officer. Many slots for other top positions are likewise vacant — as they are at Fannie Mae. Lockhart recently said of the agencies that “everybody is stretched very thin.” That is only one of the problems.
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