Housing Bubble
Freddie Mac Chief Economist responds to Poole's comments
March 11 , 2003
In a speech made at a housing market symposium sponsored by the Office of Federal Housing Enterprise Oversight, Freddie Mac Chief Economist Frank Nothaft discussed the nation’s mortgage credit needs over the next decade. Nothaft forecasted approximately $16 trillion in mortgage originations over the next 10 years, financing about 100 million homes. He also expects mortgage debt outstanding to grow by approximately 8.0 percent and mortgage debt outstanding to double to $12 trillion by 2010.
In response to remarks made earlier in the day by William Poole, President of the Federal Reserve Bank of St. Louis, comparing Freddie Mac’s capital to that of depository institutions, Nothaft explained that Freddie Mac’s capital is significantly greater than banks’ relative to the credit risks that we and banks take.
One stark illustration of the differing risk profile of Freddie Mac compared to banks, according to Nothaft, is the level of charge-offs. Banks engage in all sorts of risky lending, including unsecured loans to foreign countries, to start-up businesses and to a wide variety of other commercial ventures. In contrast, Freddie Mac purchases only U.S. residential mortgage loans, the safest type of lending in the world. As evidence of this lower risk profile, Freddie Mac had charge-offs of less than a single basis point last quarter, while the banking industry had charge-offs of approximately 110 basis points, a dramatically larger loss rate. Nothaft pointed out that using the ratio of charge-offs to capital, banks should hold 350 to 400 percent capital compared to the 11 percent they now hold.
Second, Mr. Poole questioned Freddie Mac’s liquidity position. But the fact is that Freddie Mac has made extraordinary and transparent commitments to ensure our ongoing liquidity in the event of a financial disruption. In 2000, as part of our Six Commitments initiative, Freddie Mac and Fannie Mae agreed to take sufficient steps to ensure our liquidity for a period of at least three months – more than any other financial institution. This agreement includes holding a highly liquid portfolio of securities and providing quarterly disclosures regarding our current liquidity position.
America’s Mortgage Credit Needs: Ten-Year Projection
Source: Fredie Mac
