The Fannie Mae and Freddie Mac Bailout Is Official
Fannie and Freddie have $5.4 trillion in mortgage backed securities and debt outstanding, with a market share of over 80 percent of all new mortgages this year. However, the two mortgage giants ability to raise and maintain capital has been questioned over recent months.
The Office of Housing Enterprise Oversight (OFHEO) along with the Federal Reserve and the OCC have came to the conclusion that the mortgage giants are unable to operate safely and soundly to fulfill their critical public mission of stabilizing the residential housing market in the US.
With Fannie and Freddie incapable to restore the balance between safety and soundness, the FHFA has placed the two mortgage lenders into conservatorship until the entities can return to normal business operations. The Boards of both Fannie and Freddie did consent to conservatorship on September 06 2008.
"I strongly endorse both the decision by FHFA Director Lockhart to place Fannie Mae and Freddie Mac into conservatorship and the actions taken by Treasury Secretary Paulson to ensure the financial soundness of those two companies. These necessary steps will help to strengthen the U.S. housing market and promote stability in our financial markets. I also welcome the introduction of the Treasury's new purchase facility for mortgage-backed securities, which will provide critical support for mortgage markets in this period of unusual credit-market uncertainty," stated Federal Reserve Board Chairman Ben S. Bernanke.
Under conservatorship Fannie and Freddie will be allowed to grow their mortgage backed securities without limitations, an estimated $20 billion per month without capital constraints. The current CEO’s of the two mortgage lenders will be leaving as the FHFA will assume power of the board. Also, common stock and preferred stock dividends will be eliminated, but the stocks will remain outstanding in an effort to conserve over $2 billion in capital every year.
James Lockhart has already filled CEO positions, naming Herb Allision CEO of Fannie Mae and David Moffett CEO of Freddie Mac. Although other management action will be very limited, both Allision and Moffett have agreed to work with current Fannie and Freddie management and employees.
Treasury Secretary Henry Paulson has taken three additional steps to compliment FHFA’s decision to place the mortgage giants into conservatorship. First, Treasury and FHFA have established Preferred Stock Purchase Agreements, contractual agreements between the Treasury and the conserved entities. With this agreement, Treasury receives senior preferred equity shares and warrants that protect taxpayers.
The second step establishes a new secured lending credit facility, which is intended to serve as an unlimited liquidity backstop. In July of 2008 the US Congress granted this backstop to Fannie and Freddie which expires in December of 2009.
Finally the Treasury is initiating a program that temporarily allows the Treasury to purchase mortgage backed securities issued by Fannie Mae and Freddie Mac. The mortgage backed securities that the Treasury may purchase include newly originated mortgages that are deemed appropriate. If the Treasury can hold the securities to maturity, taxpayer losses shall not occur, in fact the program could produce gains.
“I recognize that there are strong differences of opinion over the role of government in supporting housing, but under any course policymakers choose, there are ways to structure these entities in order to address market stability in the transition and limit systemic risk and conflict of purposes for the long-term. We will make a grave error if we don't use this time out to permanently address the structural issues presented by the GSEs,” stated Secretary Henry Paulson.
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Submitted by admin on 9/07/08 |