Freddie Mac CEO: Home Prices Will Continue to Drop
This is why I'm not concerned about my current CAPS scores on all of my mortgage companies and home builders:
The chief executive of Freddie Mac, one of the biggest mortgage buyers in the nation, said the housing market will get worse before it gets better.
Speaking to investors and analysts Wednesday at a meeting in New York, Freddie Mac (FRE: 20.02, -0.14, -0.69%) CEO Dick Syron said the decline in home prices nationwide is only "one-third" of the way done.
"We're facing an extraordinary challenge in the housing market, the equivalent of the 100-year storm," Syron said. "We are not pretending that home prices have reached a bottom."
Syron said home prices nationwide will likely decrease 15% rather than the 10% originally estimated by the agency. And some areas will be hit harder than 15%, he said -- mainly on the East and West coasts.
Despite concerns for how Freddie Mac and its government-sponsored cousin Fannie Mae (FNM: 20.89, -1.11, -5.04%) will weather the housing slump, Syron and other Freddie Mac officials said the company is well positioned to handle any long-term concern and the company has more than enough capital to absorb the losses.
"We could have raised less and gotten by, but we wanted to raise enough capital in case of the continued substantial housing deterioration," Syron said.
There has been an upside to all of this for Freddie. Because the subprime mortgage mess basically wiped its competitors off the map, both the market share of Freddie and Fannie have increased substantially in recent years. Paul Mullings, senior vice president of single family housing, told analysts and investors that Fannie and Freddie's market share of mortgages has increased to more than 70% in 2008.
"There has been a flight to quality, so people have come back to the GSEs (government sponsored enterprises)," Mullings said.
In mid-2006, when the housing market was its height and the cost of borrowing was much lower, that share was just over 30%.
"Much of the irrational approach to pricing and credit is being rung out of the system," Syron said.
Also, Freddie is seeing increases in their portfolio of multifamily housing mortgages because people are foreclosing on their homes and being forced back to renter status, he said.
Mike May, senior vice president of multifamily sourcing, said Freddie had a record number of mortgage purchases backed by rental properties. In 2007, the company bought more than $20 billion in multifamily mortgages, compared to $10 billion two years ago. He said multifamily mortgages will continue to increase because many people are not financially ready to own a home and the trends will now favor renting over home ownership for years to come.
Syron echoed May's comments.
"There is a reality that we need to face - that the belief that everyone in the U.S. can afford to be homeowners instead of renters is perverse," Syron said. "We should not be encouraging the GSEs to put people into homes that they'll end up losing later."