Some say Freddie Mac's woes could drive mortgage rates higher, home prices lower. Not so fast.
June 11, 2003: 4:14 PM EDT
By Chris Isidore, CNN/Money Senior Writer
http://money.cnn.com/

NEW YORK (CNN/Money) - Could Freddie Mac's accounting problems be the pin that finally bursts the bubble that some people say the nation's housing market has become?

Some critics who say there is a dangerous runup in housing prices across the nation worry that the shake-up at the nation's No. 2 domestic mortgage financing company could spell big problems for home prices -- and the U.S. economy.

But others less concerned about a housing bubble said that the shake-up at Freddie Mac is an isolated event that in the end will have little impact on retail mortgage rates or housing values.

Freddie Mac said Monday it fired President David Glenn due to questions about his candor as the company worked on restating earnings as far back as 2000. It also delayed the restatement and said Chairman and CEO Leland Brendsel and Chief Financial Officer Vaughn Clarke also were leaving the company.

Questions about Freddie Mac's finances could spark investor concerns about its mortgage-backed securities, which are crucial to providing funds for banks and other mortgage lenders. Freddie Mac, a government-chartered company, buys mortgages from lenders and packages them into securities that are sold to investors, thus providing fresh funds for mortgages.

If Freddie Mac's problems mount, that could drive up mortgage rates, which could hurt the housing market and possibly lead to a sharp drop in home prices.

"I wouldn't necessarily predict this would be a trigger, but I wouldn't rule it out either," said Dean Baker, co-director of the Center for Economic and Policy Research, an independent liberal Washington think tank. "It wouldn't surprise me if you see money leaving the secondary mortgage market, leading housing prices to fall."

John Talbott, a visiting scholar at the Anderson School at UCLA and author of a new book, "The Coming Crash in the Housing Market," said he thought the collapse in housing prices would reveal problems at Freddie Mac and No. 1 financier Fannie Mae. But Monday's news could prove to be even worse for the housing market than he had expected.

"This is the worst case scenario," he said. "I envisioned a lot of little small things that caused housing prices to decline, then reaching into the secondary market. What we're seeing is Freddie and Fannie have their own problems. This is the first big event, and there's lots more bad news coming."

But Mark Riedy, director of the Real Estate Institute at the University of San Diego and a former president of Fannie Mae, said it was too soon to predict that problems at Freddie Mac would force rates higher or home prices lower.

"My gut tells me even with these corporate oversight issues, it will be business as usual from a real estate perspective," he said. "You've got tremendous underlying collateral value, and you've got a company, as big as it is, that there is no way the federal government would allow it to fail. I don't see anything other than a blip while people figure out what the hiccup means."

Keith Gumbinger, vice president of HSH Associates, a publisher of mortgage information, said that with mortgage rates at historically low levels, the mortgage market should be able to weather a modest increase in rates. And he believes that while there is a risk that Freddie Mac's woes could push rates slightly higher, that is a far cry from predicting the collapse of the housing market.

"It certainly could cause a change to the marketplace," said Gumbinger. "But you're trying to talk about whether the 14th card might fall when first one hasn't fallen yet."

Still, Baker from the Washington think tank argued that small problems with one company can have a much larger impact on investor confidence and broader prices across financial markets.

"After a lot of disclosures with Enron and then with WorldCom, the markets took a tumble. It wasn't those events specifically, it was that those disclosures caused people to take a harder look at stocks they were holding and ask, 'What return am I getting versus the risk involved?'

"Freddie Mac's problems might only raise mortgage rates 2/10 of 1 percent," Baker continued. "But that could start a cycle of higher rates that could pop the [housing] bubble. If you hadn't had mortgage rates at historic lows, I'm certain the bubble would have burst already."