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C-SPAN’S “NEWSMAKERS”

PEDRO ECHEVARRIA: Joining us this week on Newsmakers, the Chairman and CEO of Freddie Mac, Richard Syron. Welcome and thanks for coming in, Mr. Syron.

RICHARD SYRON, CHAIRMAN AND CEO, FREDDIE MAC: Well, thank you very much for having me.

ECHEVARRIA: Our reporters will be talking to him during the course of 25 minutes, or so, are Alan Zibel of the Associated Press Services, their business reporter. Also joining us, Benton Ives of Congressional Quarterly. And, he serves as their economic reporter.

Mr. Syron, just to give the viewers at home, who may not know what Freddie Mac is, what is it, and what is their role in the mortgage industry?

SYRON: Well, you know, that's a very reasonable question because we're what's called a GSE. When you tell people that, most of them think that it's the thing on their dashboard that tells them where to go.

But, it's a government sponsored enterprise, which is a private corporation chartered by the Federal Government to aide the mortgage market by providing stability, liquidity and affordability in home mortgages. And, to bring it home, it's the reason, in the United States, you're able to have long-term, fixed-rate mortgages, which no other country has.

ECHEVARRIA: Alan Zibel, you get the first question.

ALAN ZIBEL, BUSINESS REPORTER, ASSOCIATED PRESS: Yes, in some sense, was this housing market correction that we're going through now, was it inevitable, given the huge run-up in prices?

SYRON: I think so. You're not supposed to give (INAUDIBLE) categorical answers, but I think so. You know, I think this has been – you look at this whole economic cycle, it's been very different than almost all others, because it was a cycle that was prompted as, Alan, your question, suggest by the bursting of a bubble.

No one really thought you could have a bubble, because we hadn't had a turndown in housing prices, on a national level, since the Great Depression when it was obviously generated by, you know, people, an enormous number of people losing their jobs. But, this was a bubble. The bubble burst, and it's been different that way.

ZIBEL: Who would you say is responsible for the bubble becoming so, you know, inflated? I mean there's all – we've been happening for months and months and, people have been looking back at what happened. We you're looking back at it, who would you say is responsible?

SYRON: Well, I think that in terms of kind of forces. And, I think there are three things responsible for this. I'd say, you know, two of them are new, and one is eternal. And, the first thing I think is responsible, is we had a whole change in the way that the mortgage market worked, from people used to originate to own.

You know, banks would originate and they owned the mortgage and we – it's a benefit to society, in the long run. But, every benefit sometimes has risks. We changed to a model in which people originated to sell, to securitize and sell.

And, when people don't have as long a term, a longer-term interest in, necessarily, the behavior of the mortgage, then, what happened is we had a really steep downtrend, in underwriting standards. I think that's one thing that accounted for it.

And, I think, another thing that accounted for it was an enormous advance over time, it's effected in society and technology that really enabled a lot of these things. And, where you could have a mortgage made at, you know exaggerating a little bit, but at 10:00 in the morning, in California, and a 10:00 in the next morning being traded in a Prague, or something.

The third thing, I think, is eternal. And I think that, and that is the balance of when people buy anything, of fear and greed. We get carried away with the idea that housing wasn't just a place you lived, but it was a great investment. People saw it going up like crazy. Greed took over a while, and I think now we're in the fear part of the cycle.

ZIBEL: Considering Freddie Mac's importance, as a provider of liquidity in the mortgage market, do you guys have any responsibility in the wake of the bubble bursting, if you will, to help prop up home prices?

SYRON: There's no question that we have a responsibility to help. And, actually, we've been doing a lot in that market. I mean, recently in cooperation with the Treasury and our regulator, we've done some things to buy a lot of, this sounds esoteric, but, mortgage-backed securities, so securities that are created out of mortgages.

That's help bring the spread, or the rate, a rate reduction in home securities, which ultimately, you have about six tenths of a percent which ultimately – maybe seven tenths of a percent – translates to lower-rate mortgages. We've done some things in the now called, Jumbo-Conforming Market, which, as you know, largely closed down.

But, we've opened up again, the spreads there, traditionally, has been around 30 basis points. They opened up to gee, 130, 140, and in some cases, 150 basis points. They're down in the neighborhood of 60, 50, 60 now and, coming down further. Beyond that, we've put into place a number of programs to try.

And you can do it, and, in a lot of cases, but you can't do it in every case, is to encourage forms of forbearance and allowing people to say in their homes. Because, everyone loses, literally, in the long run, when you move people out of a house, because you have the dead-weight loss of the – an empty house ultimately becomes worth about 20 to 30 percent lower value than a house that has someone living in it. So, the trick is, how do you keep people in them?

ZIBEL: Following up on something you'd said, I know that Freddie and Fannie are now working in the Jumbo Loan Market, as a result of Congressional action.

SYRON: That's right.

ZIBEL: They've raised the conforming loan limit, temporarily (INAUDIBLE). But, my understanding is that you still haven't done that much Jumbo Loan business, even though those spreads have narrowed that they're not a lot of loans to pipeline. Why is that?

SYRON: Well, I think, you know, you raise a good point when you used the word, pipeline. It takes things longer to occur than I would have initially had thought. I would have thought you change something on Tuesday, and by Friday, behavior change.

But, there's whole sets of organizations. You've got to go through mortgage brokers, originators, et cetera, et cetera. And, quite candidly, about it you know, we have – and it's the reason we didn't – we're suffering. But, we haven't suffered as much as other organizations have, in this process.

As we've traditionally had quite conservative, as is appropriate, given the kind of organization we are, lending standards. And, the lending standards we put out, we think were appropriate for the Jumbo Market, as they're similar to we have, for what's the "Conventional Market," the regular market, the market before, underneath about $450,000.

But, there are a number of these mortgages that were very highly leveraged, originally. And, you know, we don't do very, very highly leveraged mortgages, in a lot of cases. But, we had just recently, with about four mortgage originators, done a new program in California. We're doing an increasingly larger number of mortgages.

ZIBEL: Is there some concern that if the loan limit increase for this Jumbo Market is only temporary, that that will essentially de-fang the program, that only having a limited window would remove its efficacy?

SYRON: Well, I mean, I think the program can still be efficacious during the period it's in play. And, it applies to mortgages that originated during the year. There's a big debate in Congress about this now.

But, I think that there is some legitimate concern about that. And, particularly, giving, going back to your earlier question, the lag time it takes for people to get up and do this. I mean, this is a new product for them, you know.

I mean, it's called a Jumbo Conforming Mortgage, or a Conforming Jumbo; I forget what the order it goes in. So, they've gotten used to this whole new thing, how they underwrite it, how they're going to price it. And, you know, that takes some time. But, things are moving on it now.

ZIBEL: How do you answer the skeptics in Congress and in the think tanks who really worry that Fannie and Freddie pose a risk to the financial system, where the concerns that we won't be able to make it through the down trend without a government bailout?

SYRON: Well, you know, it's an interesting question. And, it's actually a question I'm asked, because it gives me a chance to address it, specifically. But, you know, we've raised $6 billion in capital. We're going to raise another $5.5.

We will have about $45 billion in capital. We run on a continuous basis, all kinds of stress scenarios and what we can go through with. And, it would really require an almost catastrophic collapse in the housing market, for us to really get into that situation.

And, you know, we run the numbers all the time. But, I'm talking about something in which – I don't expect this to happen (INAUDIBLE) catastrophes. But, in which, essentially, most of Americans' equity in their houses, was destroyed.

And, I would submit to you, that if we get into that position, that Freddie and – you're going to be glad that you had – very glad you'd be (INAUDIBLE) Freddie and Fannie to make these mortgages. And, if you get into that situation, we're going to be in economic consequences, in which we're going to be the least of anyone's worries.

ZIBEL: So, are we anywhere near that scenario?

SYRON: No, I don't think so now. I mean, we're in an interesting place now. My own view of this is, you know, people say you're at the beginning or the middle, the middle or the end. I think we're in the middle of the middle.

But, we're just seeing, now, a little bit of a change, they're just straws in the wind of hope. But, we're seeing the rate of decline, if I can call it that, in housing prices. In most states in the nation, kind of they're still declining, but the rate of decline is slowing down, or at least attenuating a little bit.

That's not true in states like California, Florida, Arizona, Nevada. But, where I'm going with that, or even Michigan and Ohio, which obviously had different things driving it, bubbled in one of the case, and economy in the second case.

I do think that we are seeing declines that in some geographic areas are going to impose, you know, pretty significant stresses on local economies. I think for the country as a whole, it's been a stress, no question about it, so far. But, fortunately, the overall economy has held up reasonably well. And, in fact, better than I had expected it might, given the situation.

ZIBEL: If Freddie owns some of these subprime mortgage securities that have caused so much trouble, but it hasn't written down the value of them, can you explain why, you know, it's been such a big news story at Citigroup and obviously Bear Stearns, and those banks, but Freddie has not, you know, taken a write down on the of those.

SYRON: Yes, well, that's another important question. The reason we haven't is we don't own any subprime mortgages, directly, or essentially none, directly. We own, you're right, some securities that have subprime mortgages in them, behind them.

But, we have very, very substantial subordination levels. In other words, we have people with; they are usually to take more than 30 percent of the hit before it gets to us. And, what we've done, just recently, is we've gone through these securities, bond by bond, right, and looked at how they are performing now.

We haven't suffered any real losses on them. They're cash flowing. And, under accounting principles, because of tax laws and other things, you're not allowed to provide for a loss, unless you really expect a loss. We've gone through this with our public accounting firm and looked, as I've said, on a bond-by-bond basis. And, at this point, our expectation is we won't suffer any material losses.

ECHEVARRIA: Just want to take a moment, saying that we are watching Newsmakers, our guest, Richard Syron of Freddie Mac, as their chairman and CEO. Our reporters interview him today are Alan Zibel of the Associated Press, and Benton Ives of Congressional Quarterly. Mr. Ives.

BENTON IVES, ECONOMIC REPORTER, CONGRESSIONAL QUARTERLY: Following up on that, this question of why did the investment banks, then, take such big write-downs on seemingly similar securities?

I mean, I realize these products are very complicated, but it's, for someone with a basic understanding, it seems very different that you guys aren't taking a write-down, but, the banks are taking billions?

SYRON: Well, I think it has to do with one, where the losses actually were realized. I mean, we are a buy and holder, right? The investment banks have been more of a trader in these securities. And, you know, if we were to try to sell some of these securities now, we would, in all likelihood, take a loss on some of them.

But we – they're running off at a fairly rapid rate. And, we plan on holding them all to maturity. And, when we look at the bond to maturity, we expect that they're good. That's one factor. Two, is a lot of what the investment banks held were not as high, even within this bond spectrum, in the credit tower, if you will.

I mean, we bought the most cautious stuff, the stuff that had the highest degree of subordination. And, we also didn't risk I know, you can drive people crazy with the alphabet soup of names here.

But, we didn't buy any CDOs, Collateral Debt Obligations, which have different internal characteristics on how, and in which you are much more exposed to loss, regardless of where you're supposed to be in the credit tower.

IVES: More broadly though, has this process of securitization still being an overall boon or are there deeper problems with this …

SYRON: Well, I think in the long run, right, it unquestionably is lowering interest rates for Americans, in what they pay for housing. But, I think there are very few benefits that don't come with some complications. There was no question that when people were – start at the beginning, the broker end and then selling it to the originator.

If people, you know, if you plan on making a loan, but then selling that loan within the next couple of weeks, the natural human tendency is to pay a lot less attention to its credit worthiness if you plan on having that book, that on your book for some substantial period of time.

And, that is, honestly, where we differ a lot, because we are very much buy and holders. I mean, in our, we have two businesses, the investment business that you were talking about, but we also have, where we guarantee essentially close to $1.8 trillion in mortgages, in the United States.

And, it's the reason you, I won't get into all the technical things. You can have, 30-year, fixed-rate mortgages uniquely in the United States. But, you know, we have to look at that stuff pretty hard, because it's going to be on our books, essentially, until it's paid off. And, when you get to things just being traded quickly, the amount of attention that's paid to the underlying asset, isn't the same.

IVES: What's your view on the legislation that the Senate Banking Committee passed earlier this month that would give a new regulator more power over Fannie and Freddie?

SYRON: Well, you know, I mean we have said that all along, we favor legislation. We do favor this legislation. We have some issues where we want to be sure the right balance is struck, both in the writing and the implementation of the legislation. Let me just take a second to tell you what I mean by that.

These institutions are different. I mean, they're owned by private shareholders, right. Now, if you want to have them owned by private shareholders, that's one thing we have to take into consideration.

The other thing you have to take into consideration is they have a lot of privileges. So, they have a mission that they have to meet, and they should do that. And, they also have to be safe and sound. But it's a delicate balance to be sure you can satisfy all three of those things. In fact, you can never make all three happy because they conflict, in many ways. And, where I'm getting at is, if you want not to nationalize them, you could nationalize them fairly easily.

But, if you don't want to nationalize them and just be able to dictate everything they can do, but you want us, you know as I said, we're going to go raise another $5.5 billion in capital, to be able to get people to buy that stock and that debt, you've got to be able to demonstrate to them that, you know, they're not at the very end of the train.

But, they can expect that over time, they're going to earn a competitive return on that capital. Now, you know, that's a basic law of arithmetic and economics that none of us can repeal. You could say you don't want to do that, and that's OK. And, you could nationalize the institutions.

IVES: All right, should, I mean, should investors in Fannie and Freddie be worried about this legislation? I mean, you know, I read an analyst report earlier this week that mentioned that as, you know, this adds another level of unknown about, and the same report, I believe said that, you know, Freddie, didn't expect Freddie to return to profitability until 2012. I mean, should investors be concerned?

SYRON: Well, I certainly disagree with the second part of that, without getting into making specific forecasts. I think the whole – if I was an investor, I'd be paying a lot of attention to this legislation. But, I'd be paying attention to the legislation, because it is a concern they have to have, in terms of both what is in the legislation and how they expect, which is much more important.

I was a regulator. I was a bank regulator for 22 years. And, how you apply regulation is probably more important than just what the regulation says, because there has to be a lot of room for interpretation.

But, we're reasonably confident that the interpretations made by the regulator will take into consideration this admittedly troublesome balance between the three different audiences, if you would, that you have to satisfy them.

IVES: Following up on that a little bit, one of those privileges you mentioned would be the implied government guarantee of a lot of your assets. Some folks complain that there's a question of fairness then, for private competitors, because they can't borrow as cheaply as you can, because of that implied guarantee. Is there any way to address those complaints? Would the regulator be able to do that?

SYRON: Well, I think, you know, if you look, actually what's happened, I don't think it's completely fair to say that we face no market discipline, because if you look at our own debt spreads, during, they’ve come in, fortunately, but, during the worst of times, they expanded. And, also, you know, let's be candid about it. I mean, the debt holders of Bear Stearns didn't end up suffering.

Right, I mean, they had some ill liquidity for a while. I'm not going to get into names, but I would think that there's a certain number of banks in the United States that most people who buy their debt, do so with the expectation that probably the largest, second largest, I don't know how far you want to go, bank in the United States, it isn't going to be allowed to default on its debts.

I mean, I happen to have been the president of the Federal Reserve Bank in Boston, and very heavily involved in the Bank of New England, which was all about the $16 billion bank. And that's a long time ago, 1989, 1990. But still, it was all of $16 billion, even at that time and, we didn't let that fail.

I mean, I was very heavily involved in it. We worked it down. I think actually, the FDIC’s and everyone's benefit, over three years. So, you know, we're not the only ones that people when they invest in the debt think, well, you know, this probably isn't going to be allowed to default.

IVES: So, you seem to be implying that the notion of too big to fail, should really be applied much more broader than just to Fannie and Freddie.

SYRON: Well, I think it is applied much more broadly to Fannie and Freddie. I mean, I'm trying to remember the largest major financial institution that's been allowed to fail, in some substantial time, at a cost to its creditors.

(INAUDIBLE) someone who's worked out the long-term capital. We're just seeing the essence of the Federal Reserve opening up to discount, not the discount windows formally, but, opening up something like the discount window, for investment banks.

So, you know, saying, oh, Fannie and Freddie, oh, they're too big. They won't be allowed to fail. But, we have these other things that are bigger, but we will allow them to fail.

IVES: Right.

SYRON: You know, there's a little inconsistency there.

IVES: What's your idea on legislation? I know that you said you supported it, but what would you like to see? And, how does that compare to what's being offered?

SYRON: I would like to see, actually, something that explicitly recognizes this triangle, if you can, of the obligations that says – and this is about 14 words I'd like to see. And, that is that in applying the legislation, the regulator has to take into consideration the institution's missions, safety and soundness, and obligation to, over time, provide a competitive return to shareholders. Because, that's what it's all built on. So, let's be explicit about it.

IVES: And, as far as the explicitness, how would that change your current regulator, and would it change the business of how your current regulator relates to you?

SYRON: No, I'm not saying it necessarily would change the business. But, look, when people buy equities, right, and that's what we're talking about in this case as well as debt to some extent, but, when they buy it, they hopefully buy it for some period of time.

And, you know, we've been working on this legislation for GSE (INAUDIBLE). I think I came to the place four and a half years ago when, being worked on then. And, I think it's probably fair to say that Congress isn't going to have a lot of appetite to pick it up in the next couple of years.

So, this is going to be what's in place, in my mind, over the next 10, 15, 20 years. So, I think, you know, you have to be sure, in providing the cure for today's problems, you don't create tomorrow's problem. We like to do that a lot in the United States.

And, you have to have something that's durable. And, you have to have something that assures people that over the long sweep of time, all the stakeholders, the safety and soundness stakeholder, the mission stakeholder, and the shareholder stakeholders, are treated fairly.

ECHEVARRIA: Mr. Zibel, I'm sorry, go ahead.

ZIBEL: Oh, sure, one follow-up. The newest development in this bill is a portion that requires Fannie and Freddie to back up on this homeowner rescue plan, $300 to $400 billion, potentially. What's your opinion of that change to the bill?

SYRON: Well, you know, it's a complex response, to tell you the truth. I mean, obviously, it's a direct tax on our shareholders. So, that comes back to the other concern that I have. The other issue I have is, you know, we're a housing company. And, we supported, very much, the housing fund that was part of this whole thing.

I think I'm not so upset about the way it actually is right now. But, it raises this uncertainty, if you start to say, well, these two institutions are special places, and they could be taxed, you know, to deal with – instead of funding FHA, if FHA has a deficit some place else. Instead of funding it from the taxpayer, well, we'll look to these other institutions.

I mean, you know, we do have, and, people can change it if they don't like it, but, we do have a corporate charter, right? I mean, I think most corporations would be upset if you were to say to them, well, gee, you know, (INAUDIBLE) to the Bear Stearns issue, right.

The Federal Reserve was on the hook for $29 billion worth of Bear Stearns' assets. What we're going to do is go to the top six banks in the United States and say, each of you are responsible for five of that. So, you know, it's a little bit sauce for the goose, sauce for the gander.

ECHEVARRIA: And, I'm afraid, gentlemen, that we are out of time. Richard Syron, the chairman and CEO of Freddie Mac. Thanks for being on the Newsmakers.

SYRON: Thank you very much for having me. I enjoyed it.

ECHEVARRIA: We'll be right back.

(BREAK)

ECHEVARRIA: Benton Ives, from that interview with Richard Syron, anything, did you get anything about the condition of the housing market, or the legislation that we talked about towards the tail-end of the conversation, anything new from him?

IVES: He certainly seems sanguine about the housing market, which doesn't surprise me, considering in the line the line of work that Freddie's engaged in. With regards to the legislation, he didn't say anything surprising.

Certainly, the GSEs have all said publicly that they'd like to have a new regulator put in place. Although, it would seem to me that further down the road, if in fact Congress does manage to move this bill to the President's desk, and it gets signed, it really becomes a question of how that bill becomes real regulation.

And, as is often the case here, there's a great deal of wiggle room is probably not the right word, but a lot of opportunity for that law to turn to very different regulations, which could really affect the Fannie and Freddie. Or, it could essentially have no impact, potentially.

ECHEVARRIA: Are there for instances that you can think of?

IVES: Well, the republicans have been traditionally the most, kind of you know, strict on Fannie and Freddie. And, you know, with everybody projecting that they'll lose seats, you know, in next year, the democrats would probably have more influence over who is the new regulator.

ECHEVARRIA: And, so, how would you rate their – describe the current regulator's relationship with the Fannie. Because some, in articles, and others, have talked about, I guess, the strength of the regulator towards its …

IVES: Well, I think he's – the regulator, the Director Lockhart is generally seen, I mean I think it's fair to say, as wanting to be fairly tough on Fannie and Freddie, with the concern that he says that they would pose a risk to the financial system. And, he's very much in favor of the regulator getting more powers. It might not be him, but they have, whoever's the regulator in the future, getting more power.

ECHEVARRIA: And, all of this, I guess, Rich Syron made a point, they wanted to, I guess, recognize the company's uniqueness, as far as within the legislation. Is that a hard thing to do, as far as what's being charted out by the democrats. Or, is it taking that into account?

IVES: Well, I mean, I think he really kind of clearly explained, you know, how these companies are different from, you know, other companies, you know, on Wall Street. And, one thing that I thought was interesting that I hadn't heard before was, you know, his point, you know, if you want to nationalize us, nationalize us, and, we'll be part of the government.

But, you know, if you're not going to nationalizes us, we still have shareholders to answer to. And, I thought that was an interesting point.

ECHEVARRIA: And, he described it as a fairly easy process. Well, maybe not easy, but an easier process.

IVES: Maybe easier to say than to actually do. I was also struck by that same, to even speak of renationalization was such an interesting thing, since Fannie and Freddie do have such a large public role, essentially.

I would also, I think that one has to realize, too, though, that many republicans would really like to see their role in the market reduced. That, that three-headed mission, as Syron describes, you know, produces what some in the private market think is very unfair advantages for Fannie and Freddie.

And, you know, someone like Senator Dick Shelby, the ranking member on the Senate Banking Committee, would like to see their role reduced, and not even held at their current size. And, it's unclear whether a new regulator would even be able to do that.

ZIBEL: Yes, and at the same time, there's very little private market left. I mean, you know, these investment banks that used to finance a huge, you know, I think it was over 50 percent of the new mortgages at one point. And, it's down to about, Fannie and Freddie's role is about 80 percent, at the moment. So, really, the subprime bust has really made them nervous about – they're extremely reluctant to back mortgages.

ECHEVARRIA: We started this conversation taking a look at the condition of the market. And, he described it, I guess, in his words was, we're at the "middle of the middle."

ZIBEL: Right.

ECHEVARRIA: How does that bear out to how you're reporting or what you're seeing otherwise?

ZIBEL: Yes, I mean, you know, that's sort of the cautiously, optimistic view. I mean there's obviously people who are more dire and think this is going to go along a lot longer. But, you know, I don't think Fannie and Freddie have been, they've been fairly realistic. I mean, I don't think they've been terribly, you know, rosy-eyed about the thing. I mean, they've been talking about it for quite a while.

ECHEVARRIA: And, Benton Ives?

IVES: I would agree. I think there was nothing shocking in his prediction, again. And, it would seem to jive with most people's views of the market. It's unclear. It's really unclear right now, exactly how it's all going to shake out.

ECHEVARRIA: Back to the legislation real quick. What's the biggest indicator of whether we'll see passage this session?

IVES: I think the biggest indicator will be the bill on the President's desk. And, this is a landmark bill, and landmark bills are never done until their done. They've been trying for more than 10 years to get a new regulator in place, the GSEs, and failed repeatedly.

This might be the closest they've done, so far. But, you know, making a huge change like this to a vital sector of the U.S. economy is very difficult to do, frankly. But, based on what members of the House and the Senate are concerned, it sure seems like they're ready to make a deal.

The president has also been subtly indicating that he'd be willing to sign some bill that looks a bit like the Senate and the House bill that's currently floating around. So, I would think that by the end of June, if you listen closely to the administration and to democratic leadership in both chambers, you might get a good idea of what the likelihood would be.

ECHEVARRIA: And, because this is an outgoing president, I guess, that factors in?

ZIBEL: Yes, and the fact that Senator Shelby, you know, signed on as really a, you know, a pretty key development. And, you know, if they can get bipartisans, well, the only way to pass it is with bipartisan support. So, everybody's going to have to make some concessions.

ECHEVARRIA: Alan Zibel is the business reporter for the Associated Press, Benton Ives, the economic reporter for Congressional Quarterly. Thanks for joining us on the Newsmakers.

ZIBEL: Thank you.

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