Freddie Mac Looking to Expand International Presence; Says U.S. Market Will Not Crash
U.S. mortgage finance giant Freddie Mac said Tuesday that rising mortgage rates would lead to a slowdown in the U.S. housing industry, but added that it does not expect the nation’s housing market to crash.
“Rising interest rates will lead to a slowdown in the U.S. housing market,” said CEO Richard Syron, speaking to Reuters in Paris, France, where he was on a business engagement.
Stock markets around the world have tumbled in recent weeks on fears that mortgage rates may continue their steady rise amid inflationary pressures.
“What we’re ultimately driven by is mortgage debt outstanding. That’s the total amount of mortgages which are generated in any year in dollars in the United States. That grew a little close to 13 percent last year. We think the rate of growth this year will be substantially less, it will be in the 8-10 percent range, my own view is that it will be toward the low end of that,” Syron said.
The exec added, however, that despite increased inventory, the U.S. housing market was not likely to crash, as predicted by many bubble theorists frightened by the effect of higher rates. Freddie Mac does not anticipate a crash, rather a material slowing of appreciation in terms of housing prices. An absolute decline would be unlikely given many market conditions.
“In terms of our current book, we don’t think it will have much of an effect. We’ve been very cautious in how we’ve guaranteed obligations over time. Our loan-to-value ratio on a typical mortgage that we’ve guaranteed is around 55 percent, not much over 50 percent,” Syron said.
Higher rates would not necessarily have much of an impact on Freddie Mac, which is recovering from a multibillion-dollar accounting scandal.
“There’s a lot of equity in these properties. We don’t think we’re very vulnerable from a credit position,” said Syron, who went on to state that 2006 was likely to be a slower growth than 2005 in terms of Freddie Mac’s retained portfolio.
A federally-chartered, shareholder-owned financial institution, Freddie Mac and sibling enterprise Fannie Mae are entrusted by the U.S. Congress to support the housing industry by keeping money flowing into the mortgage market. To do this, they sell debt and use the proceeds to buy mortgages from lenders, giving lenders money to make more loans. At that point they “securitize” or repackage loans into securities for sale to investors.
Freddie Mac, which also recently realigned its insurance underwriting policies, wants to maintain a solid presence in European markets and do more transactions in Europe in the longer term.
“What we want is to be sure we have a well diversified source of finance outside of the United States as well as inside the U.S.,” Syron said.
Freddie Mac’s earnings have not been current since accounting problems in 2003 led to a $5 billion restatement and overhaul of its management. Syron reaffirmed that Freddie Mac hopes to report 2006 numbers in the first quarter of 2007, and added that the organization’s position was strong and expected to remain so for the near future.
“We have an extremely strong capital position. We have 45 percent excess capital over what’s required by law,” he said. “Our dividend has increased 81 percent in the last two years. We hope that, consistent with getting our financial house in order, and generating strong earnings, that we continue to increase the dividend over time.”
