Government Takes Control of Fannie, Freddie
Monday, September 08, 2008
The federal government has taken control of mortgage giants Fannie Mae and Freddie Mac. Top executives at both companies have been relieved of their duties, and the recently formed Federal Housing Finance Agency (FHFA) has been appointed conservator of the two government-sponsored enterprises (GSEs), charged with reorganizing and rehabilitating their business affairs.
Enacting the custodial authority granted by the Housing and Economic Recovery Act of 2008, Treasury Secretary Henry Paulson and FHFA Director James Lockhart made the announcement of the historic takeover in Washington yesterday. A representative from Freddie Mac issued a statement to the press on Sunday saying the company had no comment on the announcement, and Fannie Mae has yet to remark on the takeover. Lockhart revealed in his address yesterday though, that the Boards of both companies consented to the conservatorship on Saturday.
Lockhart also announced the appointment of Herb Allison as the new CEO of Fannie Mae and David Moffett as CEO of Freddie Mac. Allison served as the vice chairman of Merrill Lynch and was chairman of TIAA-CREF for the last eight years. Moffett was the vice chairman and CFO of US Bancorp. Lockhart added that the former CEOs of both companies have agreed to provide support to the new chiefs through the transition.
Lockhart said that over the last three years the Office of Financial Housing Enterprise Oversight (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,” Lockhart said. “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.”
Between them, Fannie Mae and Freddie Mac have $5.4 trillion of guaranteed mortgage-backed securities (MBS) and debt outstanding – a figure that Lockhart pointed out was equal to the publicly held debt of the United States. The GSEs' market share of all new mortgages reached over 80 percent earlier this year, but both companies have struggled through the nation's housing crisis, reporting substantial losses quarter-over-quarter.
According to Paulson, the U.S. economy and its markets will not recover until the bulk of the housing correction is behind us. Fannie Mae and Freddie Mac, he said, are critical to turning that corner. “Therefore,” Paulson continued, “the primary mission of these enterprises now will be to proactively work to increase the availability of mortgage finance, including by examining the guaranty fee structure with an eye toward mortgage affordability.”
Paulson outlined four steps to be taken to support the greater objective of the GSEs:
1. The GSEs will modestly increase their mortgage-backed securities (MBS) portfolios through the end of 2009. Then, to address systemic risk, in 2010 their portfolios will begin to be gradually reduced at the rate of 10 percent per year, largely through natural run off, eventually stabilizing at a lower, less risky size.
2. The 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. Additionally, under the terms of the agreement, common and preferred shareholders bear losses ahead of the new government senior preferred shares.
The agencies encourage depository institutions to contact their primary federal regulator if they believe that losses on their holdings of Fannie Mae or Freddie Mac common or preferred shares, whether realized or unrealized, are likely to reduce their regulatory capital below “well capitalized.” The banking agencies are prepared to work with the affected institutions to develop capital restoration plans consistent with the capital regulations.
3. The Treasury will establish a new secured lending credit facility which will be available to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. This facility is intended to serve as an ultimate liquidity backstop, in essence, implementing the temporary liquidity backstop authority granted by Congress in July, and will be available until those authorities expire in December 2009.
4. Finally, to further support the availability of mortgage financing for millions of Americans, the Treasury is initiating a temporary program to purchase GSE MBS. The Treasury will begin investing in new GSE MBS later this month, and additional purchases will be made as deemed appropriate. This program will also expire in December 2009.
Just four weeks ago, Secretary Paulson told the public there were no plans for a GSE bailout. But on Sunday, he definitively stated that Fannie and Freddie pose a systemic risk to the economic health of the country and “cannot continue in their current form.”
Paulson explained, “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 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.”
According to figures from the Congressional Budget Office, the bailout could cost taxpayers up to $25 billion. Paulson stated that because the GSEs are Congressionally-chartered, only Congress could address the inherent conflict of attempting to serve both shareholders and a public mission. He added that responsibility would be deferred to the new Congress and the next Administration to decide what role government in general, and Fannie and Freddie in particular, should play in the housing market, and that the restructuring of the mortgage giants would fall on the shoulders of the new Administration.
“Nothing about our actions today in any way reflects a changed view of the housing correction or of the strength of other U.S. financial institutions,” Paulson said.
“Monday morning the businesses [Fannie Mae and Freddie Mac] will open as normal, only with stronger backing for the holders of MBS, senior debt, and subordinated debt,” Lockhart assured the publlic.
To read FHFA Director Lockhart's full statement, click here. Secretary Paulson's address regarding the takeover can be found by clicking here. The FHFA also provided a Q&A Fact Sheet on the conservatorship, which can be found here.
Enacting the custodial authority granted by the Housing and Economic Recovery Act of 2008, Treasury Secretary Henry Paulson and FHFA Director James Lockhart made the announcement of the historic takeover in Washington yesterday. A representative from Freddie Mac issued a statement to the press on Sunday saying the company had no comment on the announcement, and Fannie Mae has yet to remark on the takeover. Lockhart revealed in his address yesterday though, that the Boards of both companies consented to the conservatorship on Saturday.
Lockhart also announced the appointment of Herb Allison as the new CEO of Fannie Mae and David Moffett as CEO of Freddie Mac. Allison served as the vice chairman of Merrill Lynch and was chairman of TIAA-CREF for the last eight years. Moffett was the vice chairman and CFO of US Bancorp. Lockhart added that the former CEOs of both companies have agreed to provide support to the new chiefs through the transition.
Lockhart said that over the last three years the Office of Financial Housing Enterprise Oversight (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,” Lockhart said. “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.”
Between them, Fannie Mae and Freddie Mac have $5.4 trillion of guaranteed mortgage-backed securities (MBS) and debt outstanding – a figure that Lockhart pointed out was equal to the publicly held debt of the United States. The GSEs' market share of all new mortgages reached over 80 percent earlier this year, but both companies have struggled through the nation's housing crisis, reporting substantial losses quarter-over-quarter.
According to Paulson, the U.S. economy and its markets will not recover until the bulk of the housing correction is behind us. Fannie Mae and Freddie Mac, he said, are critical to turning that corner. “Therefore,” Paulson continued, “the primary mission of these enterprises now will be to proactively work to increase the availability of mortgage finance, including by examining the guaranty fee structure with an eye toward mortgage affordability.”
Paulson outlined four steps to be taken to support the greater objective of the GSEs:
1. The GSEs will modestly increase their mortgage-backed securities (MBS) portfolios through the end of 2009. Then, to address systemic risk, in 2010 their portfolios will begin to be gradually reduced at the rate of 10 percent per year, largely through natural run off, eventually stabilizing at a lower, less risky size.
2. The 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. Additionally, under the terms of the agreement, common and preferred shareholders bear losses ahead of the new government senior preferred shares.
The agencies encourage depository institutions to contact their primary federal regulator if they believe that losses on their holdings of Fannie Mae or Freddie Mac common or preferred shares, whether realized or unrealized, are likely to reduce their regulatory capital below “well capitalized.” The banking agencies are prepared to work with the affected institutions to develop capital restoration plans consistent with the capital regulations.
3. The Treasury will establish a new secured lending credit facility which will be available to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. This facility is intended to serve as an ultimate liquidity backstop, in essence, implementing the temporary liquidity backstop authority granted by Congress in July, and will be available until those authorities expire in December 2009.
4. Finally, to further support the availability of mortgage financing for millions of Americans, the Treasury is initiating a temporary program to purchase GSE MBS. The Treasury will begin investing in new GSE MBS later this month, and additional purchases will be made as deemed appropriate. This program will also expire in December 2009.
Just four weeks ago, Secretary Paulson told the public there were no plans for a GSE bailout. But on Sunday, he definitively stated that Fannie and Freddie pose a systemic risk to the economic health of the country and “cannot continue in their current form.”
Paulson explained, “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 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.”
According to figures from the Congressional Budget Office, the bailout could cost taxpayers up to $25 billion. Paulson stated that because the GSEs are Congressionally-chartered, only Congress could address the inherent conflict of attempting to serve both shareholders and a public mission. He added that responsibility would be deferred to the new Congress and the next Administration to decide what role government in general, and Fannie and Freddie in particular, should play in the housing market, and that the restructuring of the mortgage giants would fall on the shoulders of the new Administration.
“Nothing about our actions today in any way reflects a changed view of the housing correction or of the strength of other U.S. financial institutions,” Paulson said.
“Monday morning the businesses [Fannie Mae and Freddie Mac] will open as normal, only with stronger backing for the holders of MBS, senior debt, and subordinated debt,” Lockhart assured the publlic.
To read FHFA Director Lockhart's full statement, click here. Secretary Paulson's address regarding the takeover can be found by clicking here. The FHFA also provided a Q&A Fact Sheet on the conservatorship, which can be found here.
