Freddie Mac: Home-price drop is just ‘halfway through’


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Mortgage giant Freddie Mac, which today reported an $821-million second-quarter loss on rising loan defaults, had nothing cheerful to say about the trend in home prices.

From CEO Richard Syron, during the company’s conference call with analysts:

Since the date of our first-quarter call, recent data have prompted us to increase our estimate of future house price declines. Previously we said house prices would fall at least 15% nationally peak-to-trough. Today’s challenging economic environment suggests the housing market is far from stabilizing. As a result, we now believe that national home prices will fall 18% to 20% peak-to-trough. . . . The long and short of it is we now think we’re about halfway through the overall peak-to-trough decline.


Wall Street’s fear has been that before the housing market could hit bottom, Freddie Mac’s capital would be virtually wiped out by loan losses on its mammoth portfolio. That is what drove the stock as low as $3.89 in mid-July -- and what subsequently forced Congress to give the Treasury Department the ability to pump taxpayers’ dollars in Freddie and its sister company, Fannie Mae, if necessary.

Today, given Freddie Mac’s second-quarter loss (which was more than three times larger than Wall Street had expected) and the company’s decision to slash its dividend at least 80%, investors again are bailing on the stock. It was down $1.48, or 18.4%, to $6.56 at about 12:25 p.m. PDT. The price had bounced as high as $10.80 in the weeks after the Treasury rescue plan was announced July 13.

Fannie Mae shares were off $2, or 14.7%, to $11.60.

Many critics of Freddie and Fannie say it no longer makes sense for the companies to try to serve two masters -- shareholders’ interests and the government’s public-policy interests (i.e., rescuing the mortgage market). That’s the argument for having the Treasury simply nationalize the companies.

Analyst Howard Shapiro of Fox-Pitt Kelton put the question directly to Syron during the conference call: ‘Are we at a point in time where the inherent contradiction between Freddie Mac’s public-policy mission and its responsibilities to shareholders is unsustainable?’

Syron’s response: ‘I don’t think we’re at a point where -- to kind of cut to the chase -- the model doesn’t work anymore. I think we are at a point where the model is more stressed than it has been at some points in the past.’

He then went on to argue that ‘there’s an essentiality’ to Freddie and Fannie because mortgage credit is otherwise in such short supply.

Maybe the two are ‘essential’ -- but they don’t have to be public companies with shareholders. They could go back to being government agencies. The action in the stocks today shows another wave of doubt on Wall Street that Freddie and Fannie will emerge from this mess with much of anything left for their investors.