Accordingly, some of the housing stock that is now or soon will be facing the threat of foreclosure will likely need to be converted, at least temporarily, into rental housing. So it makes sense to undertake efforts that would enable at least some of the families that briefly owned the properties to stay in them under certain circumstances, whether as ordinary renters, or on some kind of innovative shared-equity, rent-to-own or lease-to-buy basis. The specifics would have to be worked out as a matter of law and policy. But what’s already clear is that the right kinds of creative solutions would be better than foreclosure –– for lenders, families and neighborhoods alike.
One lesson I hope we all absorb from last year’s experience is that housing finance alone cannot resolve all the housing affordability challenges facing our nation. To achieve lasting gains in affordability, advances in mortgage finance must be accompanied by changes affecting the supply side of the housing equation –– such as in zoning, permitting, transportation and other policies.
In sum, we need a change of perspective, emphasizing sustainable homeownership –– homes that families can afford to buy and keep –– over mere homebuying. Any other approach elevates statistics over human lives: the short-term satisfaction of telling ourselves the homeownership rate is increasing, when what really matters is the long-term strength of our families, our neighborhoods and our economy, as shown by the events of 2007.
That’s a perspective on the extraordinary developments of the last year. Now let’s take a closer look at how Freddie Mac has managed its way through them –– starting with our progress in financial reporting.
ADvAnCES In FInAnCIAl REpoRTIng
We have reached a major milestone on Freddie Mac’s road back to normalcy. With the publication of this 2007 annual report, we are again timely in our financial reporting. This has taken a lot of time, effort and resources, but the benefits are substantial. While much remains to be done, the company and its employees have taken an important step forward.
Our advances in financial reporting go beyond timeliness. We continued to strengthen our accounting and internal controls infrastructure. To enhance transparency, we have updated several key accounting policies so as to enhance our GAAP disclosures. We are debuting in this annual report a new segment measure that will more clearly convey the specific risk/reward characteristics of our three lines of business –– and also enable investors to better assess this firm’s performance relative to its peers.
All this progress in financial reporting brings important benefits: We can be more transparent to our investors, more comparable to other financial services companies, and more focused on our business and our mission.
FInAnCIAl RESulTS AnD kEy TREnDS
As I’ve said, 2007 was an especially difficult year in many ways. The worsening environment made it very hard for any company in the housing sector to be profitable. This brought even greater challenges for a GSE like Freddie Mac, whose congressional charter limits us to serving only the U.S. residential mortgage market. Unlike other financial services companies, we did not have the option of shifting our focus or withdrawing from the mortgage markets. Rather, as required by our charter, Freddie Mac provided liquidity and stability to the conforming market –– even as others pulled back and provided neither. In so doing, we continued to support our customers and serve our public mission at a critical time.
As a result, only the conventional, conforming market supported by the GSEs was able to function more or less normally. Indeed, many observers made the point that if not for the GSEs in the conforming market, there would have been very little of a healthy U.S. mortgage market during this period.
However, clearly last year’s weakening house prices and punishing deterioration of credit hurt Freddie Mac’s results, along with those of other mortgage market participants. On a GAAP basis, based on the accounting policy changes I mentioned earlier, our 2007 net losses amounted to roughly $3.1 billion, or $5.37 per diluted share, compared with 2006 net income of $2.3 billion. These results reflected substantial losses on mark-to-market items and a higher provision for credit losses. Our mark-to-market losses of $8.1 billion mainly included $4.3 billion in interest-rate related items and $3.9 billion in credit-related items, offset by certain fees. Our provision for credit losses of $2.9 billion reflected the significant worsening of mortgage credit resulting from continued weakness in housing.
These results are plainly disappointing and put pressure on our capital, which is determined by GAAP. Looking across the U.S. financial services landscape, it’s clear that a number of other financial institutions experienced larger losses relative to the size of their mortgage portfolios. But as a company that prides itself on our singular focus and expertise in managing mortgage risk, we can and must do better –– even in the most challenging environments. Later in this letter, I’ll describe some of the steps we are taking to do so.