Freddie Mac's chairman and chief executive officer projects the housing market to get worse before it improves. The company anticipates its credit losses to be as much as $7.5 billion during the next two years.
The conventional conforming market is $9.4 trillion, of which Freddie has guaranteed $1.7 trillion -- about 43 percent of total government sponsored enterprise share, Richard F. Syron said Tuesday at an investor presentation at a Goldman Sachs conference. The company operates with high leverage and low risks.
Freddie has provided stability in the mortgage market during the Russian financial crisis, Long Term Capital Management crisis, September 11th, Hurricane Katrina and the current housing crisis, he said. The company expects home prices to drop 10 percent from their highs.
Syron noted the current market has benefited Freddie, which has seen a shift from adjustable-rate mortgage production securitized on Wall Street toward fixed-rate conforming originations -- pushing its market penetration to around 28 percent. In addition, the pricing environment and credit standards are "much improved."
"We're finally seeing a return to rationality across the entire credit spectrum," he said -- adding that the company doesn't see a turnaround in the current cycle anytime soon.
In fact, he sees the market getting worse before it improves, especially because of a possible shift in consumer confidence and the possibility of employment worsening.
But even though new business has "terrific returns," they are taking more hits up front and won't immediately see the full benefit of new business.
"If our expectations are realized, we would expect that our total future credit losses from our current book of business will total approximately 10 [billion] to 12 billion dollars," Syron stated.
In a question and answer session, another Freddie executive noted that $4.5 billion of the anticipated losses have been taken during the first three quarters of 2007, and the rest will occur over the next couple years. But a number of increased fees and currently improved business will offset these losses.
Despite the internal estimates, he said the company went to the street to determine losses will be around $16 billion to $17 billion dollars -- though it would take a credit environment that was twice as bad as the worst market experienced since World War II for the $17 billion to be realized.
The recent $6 billion prefered stock offering was well received and didn't dilute common shareholder equity.