Reining in boom-and-bust cycles

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With real estate and mortgages at the heart of the financial crisis, one of the critical parts of the government’s reworking of finance rules will be to figure out how to dampen some of the booms and busts, said James Lockhart, director of the Federal Housing Finance Agency, the umbrella entity that regulates Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks.

‘We failed to appreciate how high home prices had risen and how fast they could fall,’ Lockhart said in an address to a gathering of real estate and finance reporters in Washington. The FHFA head will be on the Financial Services Oversight Council, announced by the White House last week along with other financial regulation overhaul plans, that will look at systemic risk.

As private money has dried up, Fannie Mae and Freddie Mac have increased their share of lending to account for the majority of U.S. home loans.

The FHFA’s goals of providing stability, liquidity and affordability in the mortgage market are being realized, Lockhart said, as Fannie Mae and Freddie Mac have begun to stabilize. The two government-sponsored entities, which were taken over by the government last fall, buy home loans from lenders and package them into securities to sell to investors or the Federal Reserve.

However, Lockhart noted, ‘from the standpoint of profitability, it’s going to be a couple more years.’

--Lauren Beale, reporting from Washington

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Federal Housing Finance Agency Director James Lockhart. Credit: Carol T. Powers / Bloomberg News