Stabilizing the subprime market

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In times of economic transition, there is a critical need of balancing adequate capital with adequate credit flows, says Richard F. Syron Chairman and CEO, Freddie Mac.

"That is where we are today. The recent downturn in the housing market is slowing GDP growth, and mortgage delinquency rates are up, particularly in subprime.

Congress created the GSEs to help cushion U.S. housing markets from economic disturbances like these. When housing activity contracts, Freddie Mac and Fannie Mae increase their relative provision of funds to the mortgage market, and vice versa.

This ability to respond to market changes is what makes the GSEs a Congressional success story.

Freddie Mac supports regulatory reform that ensures both a continued strong franchise and mission achievement. Many proposals are under consideration, and it is my hope that each will be measured against the twin criteria of safety and soundness and mission.

This inevitably entails striking a delicate balance. In a number of instances, we believe the proposed legislation would strengthen GSE regulatory oversight without upsetting that balance. But, certain combinations of provisions, depending on how they are interpreted and implemented, could significantly impair either our ability to remain financially viable – or to serve our mission. Or both.

I am not talking about short-term concerns. GSE legislation has been many years in the making, and it is unlikely to be revisited for years to come. I have every confidence that Congress will strike the right balance.

A few weeks ago, Freddie Mac announced that, beginning in September 2007, we will restrict our subprime purchases to mortgages that have been underwritten to a fully-indexed level, and with tighter underwriting requirements. We also announced efforts to develop model subprime products that will provide safer financing alternatives.

These steps will help stabilize the subprime market while ensuring sustainable homeownership. In my mind, this is what being a GSE is all about. But we can only serve this function if we have the right capital and operational flexibility to respond quickly to market transitions.

Business cycles will come and go. But these economic realities should not keep families from achieving their dreams of homeownership."


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