Weekend Developments

MBA (9/22/2008 ) Sorohan, Mike
The Mortgage Bankers Association said it welcomed efforts by the Treasury Department on steps taken in the past week to support liquidity in the financial markets and will work with leaders in the House and Senate in moving forward this week with legislation.
Treasury Secretary Henry Paulson Jr. this weekend announced a number of “powerful tactical steps” to increase confidence in the nation’s financial systems, including establishment of a temporary guaranty program for the U.S. money market mutual fund industry.

“The underlying weakness in our financial system today is the illiquid mortgage assets that have lost value as the housing correction has proceeded,” Paulson said. “These illiquid assets are choking off the flow of credit that is so vitally important to our economy. When the financial system works as it should, money and capital flow to and from households and businesses to pay for home loans, school loans and investments that create jobs. As illiquid mortgage assets block the system, the clogging of our financial markets has the potential to have significant effects on our financial system and our economy.”

Treasury said it would authorize Fannie Mae and Freddie Mac will increase their purchases of mortgage-backed securities; and expand the MBS purchase program announced earlier this month to increase the availability of capital for new home loans;

“Right now, our focus is restoring the strength of our financial system so it can again finance economic growth,” Paulson said. “The financial security of all Americans—their retirement savings, their home values, their ability to borrow for college and the opportunities for more and higher-paying jobs—depends on our ability to restore our financial institutions to a sound footing.”

MBA Chief Operating Officer John Courson issued the following statement in response:

"The moves Secretary Paulson announced [Friday] to increase GSE and Treasury purchases of mortgage-backed securities should provide support for mortgage rates. The fear was that the illiquidity in the financial markets we have seen this week would have reversed the recent drops in mortgage rates.

"The broader steps outlined by Treasury are aimed at ending the further meltdown in the financial markets and are designed to minimize the resulting impact of the market turmoil on the broader economy. It is another step in the long-term process of restoring a balance between the supply and demand for housing in a number of markets and thus addressing the continuing problem of mortgage delinquencies and foreclosures.

"The mortgage finance industry looks forward to continuing to work with Congress and the Administration on this historic proposal."

In other developments:

Fed Approves Switch of Goldman Sachs, Morgan Stanley to Holding Companies. The Federal Reserve Board on Sunday approved, pending a statutory five-day antitrust waiting period, the applications of Goldman Sachs and Morgan Stanley to become bank holding companies.

In a statement, the Fed said the quick approval is designed to "provide increased liquidity support to these firms as they transition to managing their funding within a bank holding company structure." The Fed authorized the Federal Reserve Bank of New York to extend credit to the U.S. broker-dealer subsidiaries of Goldman Sachs and Morgan Stanley against all types of collateral that may be pledged at the Federal Reserve's primary credit facility for depository institutions or at the existing Primary Dealer Credit Facility; the Fed has also made these collateral arrangements available to the broker-dealer subsidiary of Merrill Lynch.

In addition, the Fedalso authorized the Federal Reserve Bank of New York to extend credit to the London-based broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley, and Merrill Lynch against collateral that would be eligible to be pledged at the PDCF. The Fed statement can be viewed at http://www.federalreserve.gov/newsevents/press/bcreg/20080921a.htm.

Treasury Clarifies Details of Guaranty Program. Treasury continued to clarify details involving the temporary guaranty program for money market funds that was announced on September 19:

1. All money market mutual funds that are regulated under Rule 2a-7 of the Investment Company Act of 1940 and are publicly offered and registered with the Securities and Exchange Commission will be eligible to participate in the program.

2. Eligible funds include both taxable and tax-exempt money market funds. The Treasury and the IRS intend to issue guidance that will confirm that participation in the temporary guaranty program will not be treated as a federal guaranty that jeopardizes the tax-exempt treatment of payments by tax-exempt money market funds.

3. The temporary guaranty program will be designed to provide coverage to shareholders for amounts held by them in such funds as of the close of business on September 19.

The Treasury statement can be found at http://www.treas.gov/press/releases/hp1151.htm.

Congress to Take Up Administration Plan
The House and Senate are expected to consider the Administration's proposal to shore up the U.S. financial system with a series of hearings and possibly votes. Paulson has been working with House and Senate leaders over the weekend to reach an agreement on a bill; both the House Financial Services Committee and Senate Banking Committee, which hold jurisdiction over such legislation, will hold hearings this week; for more details, see the "Week Ahead" section of today's MBA NewsLink.