OFHEO, GSEs Reach Agreement on Liquidity

MBA (3/20/2008 ) Sorohan, Mike; Mechem, John
The Office of Federal Housing Enterprise Oversight, Fannie Mae and Freddie Mac announced an agreement yesterday that will allow the GSEs to use a significant portion of their capital surplus for purchasing mortgages and mortgage-backed securities.
The Mortgage Bankers Association hailed the agreement. "Today's action is a crucial step in the effort to jumpstart the stalled mortgage market,” said MBA Chairman Kieran Quinn, CMB. “This immediate injection of liquidity reestablishes the pipeline of funds flowing from secondary market mortgage purchasers to primary market lenders.”

OFHEO estimated the agreement will result in an immediate injection of $200 billion into the secondary mortgage market. OFHEO said it should allow the GSEs to purchase or guarantee nearly $2 trillion in mortgages this year. “This capacity will permit them to do more in the jumbo temporary conforming market, subprime refinancing and loan modifications areas,” said OFHEO Director James Lockhart.

In turn, Quinn said, the agreement “will enhance lenders' ability to offer financing to a wide variety of borrowers, including those looking to refinance into a more stable and affordable loan. This should help keep some at-risk borrowers in their homes which will help stabilize the real estate market.”

Quinn said MBA “is very encouraged to see that OFHEO and the GSEs have renewed their commitment to GSE oversight reform. This has long been one of MBA's top legislative priorities and we are eager to work with OFHEO, the GSEs, Congress and the Administration to bring it to fruition this year."

Treasury Secretary Henry Paulson Jr. also praised the agreement. “Fannie Mae and Freddie Mac are significant participants in the mortgage market and I am encouraged that today's announcement will make more financing available in this area,” he said. “Additional capital will enable the companies to help more homeowners and will strengthen the underlying fundamentals of the mortgage market. Today's announcement also reaffirms the commitment of all parties to work toward comprehensive GSE reform legislation as soon as possible.”

As a key part of this initiative, both companies announced that they will begin the process to raise significant capital. Both companies also said they would maintain overall capital levels well in excess of requirements while the mortgage market recovers in order to ensure market confidence and fulfill their public mission.

OFHEO announced that Fannie Mae is in full compliance with its Consent Order and that Freddie Mac has one remaining requirement relating to the separation of the Chairman and CEO positions. OFHEO expects to lift these Consent Orders in the near term. In view of this progress, the public purpose of the two companies, and ongoing market conditions, OFHEO concludes that it is appropriate to reduce immediately the existing 30 percent OFHEO-directed capital requirement to a 20 percent level, and will consider further reductions in the future.

Additionally, all parties recognize the need for a world-class regulatory structure and have renewed a shared commitment to work for comprehensive GSE reform legislation.

“Fannie Mae and Freddie Mac have played a very important and beneficial role in the mortgage markets over the last year,” Lochkhart said. “Let me be clear: both companies have prudent cushions above the OFHEO-directed capital requirements and have increased their reserves. We believe they can play an even more positive role in providing the stability and liquidity the markets need right now. OFHEO will remain vigilant in supervising the safe and sound operations of these companies, and will act quickly to address any deficiencies that may arise. Furthermore, we recognize the need to ensure that their capital levels are strong, protecting them from unforeseen risks as the market recovers.”

Fannie Mae President and CEO Daniel Mudd said, “We are working with our customers, regulators and policy makers to minimize foreclosures, increase affordability—and as of today—to restore liquidity in the market. This progressive, sustainable plan will help bring the stability the market needs.”

Freddie Mac Chairman and CEO Richard Syron said, “The recent environment demonstrates the benefits of the GSEs to the U.S. economy. This approach allows us to continue to create these benefits in a way that balances our mission to provide stability, liquidity, and affordability consistent with safety and soundness while enhancing the interests of shareholders.”