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Talking with OFHEO's James B. Lockhart: Mortgage Banking recently interviewed James B. Lockhart, director of the Office of Federal Housing Enterprise Oversight, to talk about current market conditions and the role of Fannie and Freddie in restoring liquidity.

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The Office of Federal Housing Enterprise Oversight (OFHEO) is a federal regulator with oversight authority of Fannie Mae and Freddie Mac, and is charged by Congress with ensuring the capital adequacy and safety and soundness of the two government-sponsored enterprises (GSEs). Lockhart has headed OFHEO since May 2006. He also previously served as the deputy commissioner of Social Security, and was executive director of the Pension Benefit Guaranty Corporation from 1989 to 1992. Lockhart was co-founder and managing director of Greenwich, Connecticut-based NetRisk Inc., a firm that provides risk-management and software consulting to financial institutions and investment-management firms. Mortgage Banking interviewed Lockhart in October.

Q: What is the dollar volume of mortgage-backed securities [MBS] outstanding guaranteed by Fannie Mae and Freddie Mac?

A: At the end of August, the net MBS outstanding was $3.2 trillion, and their retained portfolios were about $1.5 trillion. So, their total book of business was $4.7 trillion. That's up $360 billion from the beginning of the year. Another number I like to look at--and it's important in relationship to people saying they need to have portfolio caps raised--this year on a gross basis, they securitized about $700 billion in new mortgages and they purchased for their portfolios, which have a cap, $300 billion. They were able to do this because of the run-off of their portfolio. Of that $300 billion, about $120 billion was their own MBS. So, they have a lot of purchasing power and they've been very, very active in this market, which has been useful because the conforming loan market has been performing reasonably well compared to the other parts of the mortgage market.

Q: What are Fannie's and Freddie's combined share of the market's new issuance as a portion of overall MBS issuance?

A: The numbers are up significantly, obviously because there's not a lot else going on--certainly in the mortgage-backed securities market. The share of new issuance was 60.9 percent in July and 69.3 percent in August [see Figure 1]. This compares with 45.1 percent in July 2006 and 41.2 percent in August 2006. These numbers exclude Ginnie Maes.

Q: Given the fact the new-issue market for private-label residential mortgage-backed securities [RMBS] is essentially dead, isn't Fannie's and Freddie's share of mortgage originations and overall RMBS likely to grow even faster than originally assumed? Are there dangers to the safety and soundness of Fannie and Freddie in assuming a significantly greater share of the overall origination market than they presently hold?

A: Yes, they're going to grow more than they assumed in the conforming loan area. And it's certainly higher than their business plan was--although the overall market is also shrinking somewhat, so not all the market share is totally coming to the bottom line. Yes, there are safety-and-soundness concerns. Obviously, we have the ongoing safety-and-soundness concerns of the inability to put out timely financials. Some of their systems need work. Some of their models need work. Risk management is improving, but still needs work. Internal controls are not Sarbanes-Oxley-compliant yet. So, there's a whole series of things that need work there.

But, certainly on top of that, what's happening in the mortgage market does add more potential risk. They have $4.7 trillion of mortgage-market exposure at this point on a capital base of about $80...