Government bailout welcomed by builders: a wary eye cast on intervention, but overall view is optimistic

Home Channel News, Sept 22, 2008 by Kate Fazzini

It was the blockbuster news of the month, perhaps the year: On Sept. 7, the federal government announced a plan for the Federal Housing Finance Agency to take over the country's two biggest mortgage lenders, Fannie Mae and Freddie Mac, placing the troubled government-sponsored entities under a "conservatorship."

The FHFA will now oversee the goings-on at the two lenders, with the ultimate goal of greatly reducing their mortgage portfolios. While Fannie Mae and Freddie Mac hold just under 50 percent of the total mortgage market, Fannie and Freddie hold 70 percent of all new home loans. In the past year, the two companies have lost approximately $14 billion.

"Any time you have to have the federal government take over two companies, we're disappointed in the circumstances that led to that," said Jerry Howard, executive vp and CEO of the National Association of Home Builders (NAHB).

"But we're convinced that the squeamishness of the global capital markets, the size of the debt and equity issuances of Fannie Mae and Freddie Mac, relative to the rest of the economy, are so important--and the viability of these companies going forward is so important--that something had to be done," he told Home Channel News.

The viability of the two mort gage giants--which together control $12 trillion of mortgages--is obviously a key concern. But to many in the home improvement industry, the visibility of the two organizations, and their well-publicized difficulty, has put the biggest dent in the housing market. Changing the national attitude toward home building, home buying and home improvement starts with giving consumers greater confidence, which has been lacking as Fannie and Freddie struggled.

Around the home channel, executives adopted varying degrees of optimism for the blockbuster move. Home Depot CEO Frank Blake, addressing a group of Cobb County Chamber of Commerce members just following the decision, said the conservatorship staves off what could have been a "much worse" outcome. While he said he didn't know how the move would directly affect the home improvement market, he said he considered it a "necessary step."

Meanwhile, the bailout temporarily boosted the Wall Street performance of a number of home improvement retailers. Shares of Home Depot and Lowe's gained 5.5 percent and 6.3 percent respectively on the Monday following the weekend announcement. Other home channel companies showed short-term gains following the news, including Builders FirstSource, up 14.5 percent; Masco, up 8.4 percent; Huttig Building Products, up 6.0 percent; and USG, up 6.0 percent.

Howard said that despite Wall Street's immediate reaction, the news was not wholly unexpected to those keeping a close eye on negotiations between the government and the two lenders.

"We've been hearing for the last couple of weeks that negations were underway between the regulators and the corporations," he said. "Did we expect this significant of a move? Probably not. Were we surprised by the timing? No."

During the week following the decision, Treasury Secretary Henry Paulson said the move was meant to restore stability to the crumbling housing market, a plan necessary to help the nation's economy and financial markets regain their footing.

"This conservatorship is an interim step, it could go in any number of directions from here, depending on factors such as the economy and the election," Howard observed.

In response to the decision, Howard said the NAHB will come out with its own set of suggestions for the future governance of Fannie Mae and Freddie Mac. "And I'm certain that the rest of the housing sector is going to as well," he added.

As part of the conservatorship, the federal government has replaced the CEOs and boards of directors at the mortgage giants. Fannie Mae CEO Daniel Mudd has been replaced by Herbert Allison, former CEO of TIAA-Cref; while Freddie Mac CEO Richard Syron has been replaced by David Moffett, vice chairman of U.S. Bancorp.

The Treasury's takeover is primarily meant as a stopgap measure to keep the two companies floating until next year, when a new presidential administration will determine the long-term future of Fannie and Freddie.

Despite the optimism following the Fannie/Freddie conservatorship, the U.S. housing market still is not showing any major outward signs of improvement.

The National Association of Realtors released data from its monthly Pending Home Sales Index earlier this month, an indicator based on home contracts that have been signed nationwide, showing that data dropped 3.2 percent to a level of 86.5 in July.

"Even with the Treasury Department's direct intervention in the secondary mortgage market, it is unclear if we will go back to sound normal underwriting criteria, or if it will remain overly stringent," said Lawrence Yun, chief economist for the NAR. "The housing market outlook is very cloudy."

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The assessment differs from earlier statements, such as in April when the NAR predicted the Pending Home Sales Index would start to see an upturn in the second half of 2008.