Treasury, FHFA take over Fannie and Freddie.
On Sept. 7, a Sunday morning, Treasury Secretary Henry Paulson announced he had placed Fannie Mae and Freddie Mac into conservatorship under the control of the Federal Housing Finance Agency (FHFA), the successor to the Office of Federal Housing Enterprise Oversight (OFHEO).
On July 13, also a Sunday and two days after the government takeover of Pasadena, California-based Indymac Bancorp Inc., Treasury announced it had formulated a precautionary plan to act as a contingency backstop to help the GSEs stay liquid should they need help in the wake of plummeting stock shares and shaken investor confidence.
The special financial-rescue powers, as well as the authority to place in conservatorship Fannie and Freddie, were granted to the Treasury as part of the massive new housing bill--the Housing and Economic Recovery Act of 2008 (HERA), approved in late July (see Mortgage Banking, September 2008, p. 8).
"Since this difficult period for the GSEs began, I have clearly stated three critical objectives: providing stability to financial markets, supporting the availability of mortgage finance and protecting taxpayers--both by minimizing the near-term costs to the taxpayer and by setting policymakers on a course to resolve the systemic risk created by the inherent conflict in the GSE structure," said Paulson.
"Based on what we have learned about these institutions over the last four weeks--including what we learned about their capital requirements--and given the condition of the financial markets today, I concluded that it would not have been in the best interest of the taxpayers for Treasury to simply make an equity investment in these enterprises in their current form," Paulson added.
Given that Fannie and Freddie combined have $5.4 trillion of guaranteed mortgage-backed securities (MBS) and debt outstanding, the two GSEs' "pervasive weakness across the board" raised questions of their safety and soundness that couldn't be ignored, according to FHFA Director James B. Lockhart (former OFHEO director).
"Over the last three years OFHEO, and now FHFA, have worked hard to encourage the enterprises to rectify their accounting, systems, controls and risk-management issues. They have made good progress in many areas, but market conditions have overwhelmed that progress," said Lockhart.
"The result has been that they have been unable to provide needed stability to the market. They also find themselves unable to meet their affordable-housing mission. Rather than letting these conditions fester and worsen and put our markets in jeopardy, FHFA, after painstaking review, has decided to take action now," Lockhart added.
MBA Chief Operating Officer John Courson immediately praised the action of Treasury and FHFA.
"The unprecedented steps announced today will provide confidence that the housing finance system will continue to operate without major disruption, and offer an opportunity for a recovery of the housing market while allowing for a full and frank debate over the future of the GSEs," said Courson.
Under the conservatorship plan announced by Paulson and Lockhart, Fannie and Freddie will be allowed to increase their MBS portfolios through the end of 2009 in order to promote market stability. However, starting in 2010, the portfolios will gradually be reduced at a rate of 10 percent per year through run-off, eventually stabilizing at a much smaller size.
Treasury and FHFA have established preferred stock purchase agreements to ensure that each company maintains positive net worth. 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, according to the Treasury Department.
Treasury has established a new secured lending credit facility that will be available to Fannie Mae, Freddie Mac and the Federal Home Loan Banks. Paulson, in his statement, said this facility--which will expire at the end of 2009--is intended to serve as an "ultimate liquidity backstop."
FHFA has assumed total control over the board and management at Fannie and Freddie, stock dividends of the GSEs have been suspended, and both companies were ordered to cease and desist on all lobbying/political activity.
Furthermore, the GSEs' leadership--including Fannie Mae Chief Executive Officer Daniel Mudd and Freddie Mac Chairman and Chief Executive Officer Richard Syron--have been replaced. Herbert M. Allison Jr., former chairman, president and chief executive officer of TIAA-CREF and former vice chairman of Merrill Lynch, has been appointed president and chief executive officer of Fannie Mae; and David M. Moffett, former vice chairman and chief financial officer of US Bancorp, has been appointed chief executive officer of Freddie Mac, announced FHFA.
Lockhart also announced the appointments of new non-executive chairmen of the GSEs' boards of directors. John A. Koskinen will serve as the non-executive chairman of Freddie Mac and Philip A. Laskawy will serve the same role at Fannie Mae.
FHFA directed new boards to be formed for both Fannie Mae and Freddie Mac, to ensure vigilant leadership and good corporate governance.
"Both [Allison and Moffett] bring distinguished experience to their new roles, and I thank them for their public service during this difficult period," said Lock-hart. "Good corporate governance at the enterprises is especially important right now, and I appreciate the willingness of both of these men to provide board leadership during these challenging times."
The speed of the government takeover appeared to take senior congressional Democrats by surprise. During a conference call with reporters the day after Paulson's announcement, Senate Banking Committee Chairman Christopher Dodd (D-Connecticut), noticeably irritated, said Paulson had given his committee "repeated assurances" that a government takeover would be unnecessary.
"I'm not necessarily opposed to [the Fannie and Freddie takeover], but I want to know more," said Dodd. "And we will be more cautious this time around in many respects."
Dodd and his counterpart, House Financial Services Committee Chairman Barney Frank (D-Massachusetts), announced they would each summon Paulson to hearings to explain the circumstances leading up to the government takeover.
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|Title Annotation:||Briefing Book; Federal Housing Finance Agency take over Federal Home Loan Mortgage Corp.|
|Comment:||Treasury, FHFA take over Fannie and Freddie.(Briefing Book)(Federal Housing Finance Agency take over Federal Home Loan Mortgage Corp.)|
|Date:||Oct 1, 2008|
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