First on CNBC Interview: Bill Griffeth Speaks with James Lockhart, Director, Office of Federal Housing Enterprise Oversight (OFHEO), on "Power Lunch" Today (Transcript Included)

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WHEN: Wednesday, November 21
WHERE: "Power Lunch"

Following is the unofficial transcript of a FIRST ON CNBC interview with James Lockhart, Director, Office of Federal Housing Enterprise Oversight (OFHEO) today on CNBC's "Power Lunch." All references must be sourced to CNBC.

During the interview , Lockhart discusses Freddie Mac and Fannie Mae as well as housing and the mortgage industry, among other topics.

GRIFFETH: FREDDIE MAC'S $2 BILLION LOSS TOOK THE MARKET BY SURPRISE, NOT THE LEAST BECAUSE OF THE SOLUTIONS ITS CONSIDERING COULD PUT FURTHER STRAIN ON THE ALREADY WEAK HOUSING MARKET. REGULATORS AND LAWMAKERS HAVE BEEN PUSHING THE TOP GOVERNMENT AGENCY FOR FREDDIE MAC AND FANNIE MAE BUY MORE MORTGAGES TO CALM THE MARKETS. FIRST ON CNBC, LET'S MEET THE MAN IN CHARGE OF IT ALL, JAMES LOCKHART JOINS US ONCE AGAIN. THE MARKETS WERE VERY SURPRISED BY THE SIZE OF THE LOSS ANNOUNCED BY FREDDIE MAC. I ASSUME AS THEIR OVERSEER, YOU WERE NOT?

LOCKHART: NO, WE WERE NOT.WE CERTAINLY SAW THE NUMBERS WELL BEFORE THEY RELEASED THEM, AND WE HAVE REVIEWED THOSE NUMBERS.

GRIFFETH: AND MORE TO COME, I ASSUME? DICK SIRENS SEEMED TO SUGGEST THERE WOULD BE GREATER LOSSES DOWN THE ROAD.

LOCKHART: I'M NOT SURE HE SUGGESTED THAT. CERTAINLY, WE'RE IN A PERIOD WHERE WE EXPECT TO SEE S IGNIFICANT CREDIT LOSSES.OVERALL, I THINK THE BOOKS -- MORTGAGE BOOKS ARE PROBABLY BETTER THAN THE AVERAGE ONE, BUTTHEY HAVE A VERY LARGE EXPOSURE BETWEEN THE TWO OF THEM, ABOUT $4.8 TRILLION OF MORTGAGE ASSETS.

GRIFFETH: THE QUESTION IS, WHAT ROLE CAN FREDDIE AND FANNIE PLAY IN SHORING UP A DISTRESSED MORTGAGE MARKET RIGHT NOW? SECRETARY PAULISON IS SUGGESTING THAT ON MASS SOMETHING SHOULD BE DONE ABOUT THE NUMBER OF MORTGAGES THAT WILL BE RESETTING NEXT YEAR. RATHER THAN TAKING THEM ON A CASE BY CASE BASIS. MAKING MORE FAVORABLE TERMS AVAILABLE TO THOSE MORTGAGE HOLDERS THAT WOULD BE CAUGHT WITH VERY UNVALUABLE TERMS NEXT YEAR.ARE YOU IN FAVOR OF THAT?

LOCKHART: CERTAINLY WE BELIEVE THAT THE SERVICERS THAT SERVICE THESE MORTGAGES SHOULD LOOK AT THE VARIOUS ALTERNATIVES TO HELP PEOPLE GET THEM MODIFIED SO THEYCAN AFFORD THEM. FROM FANNIE AND FREDDIE'S STANDPOINT, THEY CAN BUY AND SECURE CONSUMER LOPES.

GRIFFETH: SHOULD THE SIZE OF THE LOANS BE INCREASED.THE CAP IS 417 THOUSAND TO YOU $417 THOUSAND TO YOU THOUSAND.CHAIRPERSON BERNANKE IN TESTIMONY SAID IT SHOULD GO UP CONSIDERABLY, AT LEAST FOR A TEMPORARY BASIS. WHAT DO YOU THINK?

LOCKHART: ON A TEMPORARY BASIS THAT MIGHT BE OKAY, BUT OUR CONCERN IS THAT WE THINK THEY SHOULD BE REALLY STICKING TO WHAT THEY KNOW, AND THAT'S THE CONFORMING LOAN MARKET.THAT MARKET HAS BEEN PERFORMING WELL.THEY HAVE SECURED $100 BILL YN AMONTH AND WILL CONTINUE TO DO THAT.WE THINK THE CONFORMING LOAN MARKET AND THE MORE AFFORDABL E AREA, PEOPLE THAT ARE BEING REFINANCED OUT OF THE SUBPRIME SHOULD BE THE AREAS THEY'RE AIMING AT.

GRIFFETH: THINGS THAT CAN ALSO BE DONE IN YOUR AREA OF EXPERTISE, PEOPLE ARE TALKING ABOUT MAYBE DOING AWAY WITH A 30% SURCHARGE THAT THEY FACE RIGHT NOW. WOULD YOU BE IN FAVOR OF THAT?

LOCKHART: NO, WEREN'T IN FAVOR OF THAT. WE'VE LOOKED AT THE ISSUE. WE ASKED THEM TO KEEP 30% ON TOP OF THE MINIMUM CAPITAL REQUIREMENT BECAUSE OF THEIR OPERATIONAL RISKS THAT THEY HAVE INCURRED, YOU KNOW, STARTING THREE OR FOUR YEARS AGO WHEN THEY HAD ALL THE PROBLEMS WITH THEIR ACCOUNTING. WE THINK IT'S STILL VERY PRUDENTTO KEEP THAT IN PLACE AT THE MOMENT. IT WORKS OUT ON AN ASSET BASIS INSTEAD OF 2.5%, THEY'RE KEEPING 3.25%, WHICH IS STILL MUCH LOWER THAN OTHER FINANCIAL INSTITUTIONS. WE THINK IT'S PORNT TO KEEP THAT KIND OF CUSHION THERE. WE ALSO THINK IT'S IMPORTANT TO DO WHAT BOTH FIRMS HAVE ANNOUNCED THEY'RE GOING TO DO, WHICH IS TO RAISE CAPITAL. WE THINK THAT THEY CAN BE VERY HELPFUL IN THIS MORTGAGE MARKET AND HAVING AN ADDITIONAL CAPITALWILL BE VERY HELPFUL.

GRIFFETH: I'M NOT CERTAINLY GOING TO PUT WORDS IN YOUR MOUTH, SO LET ME SAY WHAT I THINK I HEAR YOU'RE SAYING.AS DIRE AS SOME OF THE CIRCUMSTANCES IN THE MORTGAGE MARKET SEEM TO BE, YOU SEEM TO SUGGEST THAT THE CIRCUMSTANCES ARE NOT EXTRAORDINARY ENOUGH TO TAKE EXTRAORDINARY STEPS WHEN ITCOMES TO FREDDIE AND FANNIE AT THIS POINT.AM I HEARING THAT.

LOCKHART: I HOPE THE NATURE SENATE TAKES UP LEGISLATION AFTER THE THANKSGIVING BRAKES. THAT TO ME IS THE KEY WE NEED TOHAVE A STRONGER REGULATOR AND HAVE THE KIND OF POWERS THAT THEBANK REGULATORS HAVE.

GRIFFETH: WHAT CAN'T YOU DO HA THAT YOUWANT TO DO RIGHT NOW?

LOCKHART: WE ONLY HAVE THE ABILITY TO LOOK AT THE CAPITAL AND THE SIZE OF THE PORTFOLIOS. AS SOON AS THOSE DISAPPEAR, SO DO OUR POWERS DISAPPEAR. WE DON'T HAVE POWERS THAT THE OTHER REGULATORS HAVE IN AREAS OF LITIGATION AND BUDGET, IN RECEIVERSHIP. THERE'S A WHOLE SERIES OF THINGSWE'RE MISSING THAT WE REALLY NEED TO BECOME A STRONGER REGULATOR. BECAUSE THESE FIRMS ARE JUST TOO IMPORTANT.THEY LAST YEAR HAD ABOUT A 40% MARKET SHARE, OVERALL MARKETS IN THIS COUNTRY. IN THE THIRD QUARTER THEY WERE UP TO 60%.I HEARD IN OCTOBER THEY WERE UP OVER 70%. THEY'RE CRITICAL. WE NEED A STRONG REGULATOR TO MAKE SURE THEY STAY STRONG.

GRIFFETH: MR. LOCKHART, THANK YOU FOR JOINING US TODAY.




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