Fannie Mae/Freddie Mac Update

MBA (9/9/2008 ) Sorohan, Mike
The White House weighed in yesterday on the government’s virtual takeover of Fannie Mae and Freddie Mac. And Mortgage Bankers Association Chief Operating Officer John Courson, in several media interviews yesterday, reasserted MBA’s position that the government’s actions will help stabilize the mortgage market and make obtaining mortgage financing more affordable.
President Bush did not directly address the GSE takeover yesterday. But White House Press Secretary Dana Perino, in a briefing with reporters, said Treasury Secretary Henry Paulson Jr. received Bush’s “full support” in moving forward with the conservatorship of the GSEs.

“The plan that Secretary Paulson outlined had three very important goals: first and foremost, promoting market stability; ensuring the availability and affordability of home mortgages; and protecting the taxpayer,” Perino said. “The President is confident that these are the appropriate goals, and that the plan outlined will be successful. Throughout these discussions, the President was continuously briefed by Secretary Paulson, and discussed the policy options. The President gave Secretary Paulson his full support to put the right plan in place to protect the U.S. economy.”

Treasury placed Fannie Mae and Freddie Mac under conservatorship September 7. Under the terms, FHFA has the authority to run Fannie Mae and Freddie Mac “indefinitely” if it determines that the GSEs are unable to meet their financial obligations. Under the terms of the conservatorship, the federal government can inject capital into the GSEs. To promote stability in the secondary mortgage market and lower the cost of funding, the GSEs will modestly increase their mortgage-backed securities portfolios through the end of 2009. To address systemic risk, in 2010 the GSEs’ portfolios will begin to be gradually reduced at the rate of 10 percent per year, “largely through natural runoff, eventually stabilizing at a lower, less risky size,” Treasury said.

Additionally, Treasury and the Federal Housing Finance Board (the successor to the Office of Federal Housing Enterprise Oversight) have established Preferred Stock Purchase Agreements, which are contractual agreements between Treasury and the GSEs. Under these agreements, Treasury will ensure that each company maintains a positive net worth. These agreements support market stability by providing additional security and clarity to GSE debt holders—senior and subordinated—and are designed to support mortgage availability by providing additional confidence to investors in GSE mortgage backed securities. Treasury also established a new secured lending credit facility available to Fannie Mae, Freddie Mac and the Federal Home Loan Banks. Paulson said the facility is intended to serve as an “ultimate liquidity backstop,” implementing the temporary liquidity backstop authority granted by Congress in July, and will be available until those authorities expire in December 2009.

Perino said the plan also gives time for Congress and the next administration to determine the appropriate role of the companies in the future. “Whatever eventual long-term solution is decided for Fannie Mac and Freddie Mac, it is crucial that they are reformed so that they do not pose similar risks to our economy or the financial system again,” she said.

Perino conceded that the takeover, while “the right move at the right time,” was not the action the White House ultimately wanted to take. “It's action that we needed to take,” she said. “It became clear that these companies were not going to be able to continue to function the way that they were, and that the whole system was at risk—not only here in our country, but also affecting global markets. And so given that they were already part of a quasi-federal government agency, it's only appropriate that the President take this action. And Secretary Paulson, he believes, came up with the right mix with this conservatorship.”

Courson, appearing yesterday morning on Bloomberg TV, said the government’s move assures that the mortgage market has the liquidity it needs to keep the housing market moving forward.

“I have already talked to some of our members of this morning: people are in business, making loans; borrowers can get loans, no disruptions, a very smooth transition,” Courson said. “With this additional liquidity we will now be able to bring down interest rates somewhat and make sure that the borrowers out there that have struggled to find, frankly, liquidity as the market has shrunk, will now be able to find mortgage financing.”

Courson said the events this weekend give Congress, the next administration and key players in the mortgage industry the opportunity to look at the entire secondary mortgage market.

“We have to put ourselves in a situation where we can have continued liquidity and not have a structure that has these inherent conflicts,” Courson said. “I think this is an opportunity over the next several months, with the Congress and in collaboration with other stakeholders, to look at the bigger picture and decide what is the best vehicle to provide liquidity on an ongoing basis.”