Freddie Mac chief warns of recession

Saskia Scholtes, David Wighton and Stacy-Marie Ishmael
Financial Times
Friday September 28, 2007

The US economy faces a 40 to 45 per cent risk of recession induced by the housing market downturn, the chief executive of Freddie Mac warned on Thursday as data showed sales of new homes hit a seven-year low in August.

Richard Syron, chief executive of the government-sponsored mortgage company, said the credit squeeze had left some parts of the US housing market “literally frozen”. This was a “substantial depressive to the overall economy”. He forecast the Federal Reserve would make another “material” cut in interest rates.

Mr Syron also predicted that Congress would bring some relief to the troubled US mortgage industry by lifting restraints on the operations of Freddie Mac and its sister mortgage company, Fannie Mae.

He said the $417,000 ceiling on the size of home loans they can buy was likely to be raised to help support the US mortgage market.

His comments came as data showed sales of new US homes plunging 8.3 per cent in August amid rising borrowing costs and tighter lending standards that have restricted the availability of mortgage credit.

KB Home, one of America’s biggest housebuilders, also warned that the housing market was likely to worsen next year as it posted a loss in its third quarter.

Thursday’s weak housing data from the Commerce Department show the number of unsold new homes fell only 1 per cent to 529,000 on the month, about 140,000 above levels in a healthy housing market. Median new home prices were down 7.5 per cent year-on-year to $225,700, the biggest fall since 1970.

? Separately, Freddie Mac has agreed to pay $50m to settle Securities and Exchange Commission charges that it concealed wide swings in earnings from 1998 to 2002.