The FRB took giant steps this week to rescue Fannie Mae and Freddie Mac from the current mortgage crisis and ensure the ongoing liquidity of the mortgage market. As the Wall Street Journal reported:
“Treasury Secretary Henry Paulson took the lead in crafting a rescue plan for ailing mortgage giants Fannie Mae and Freddie Mac, a move that appears to have staved off an imminent crisis but one that draws the federal government into an ever bigger role managing the American economy. ”
Read the full article in the Wall Street Journal here.
The MBA sent out a letter to their membership this week outlining the Freddie/Fannie bailout that took place over this week. Here is their summation:
“The Fed on Sunday announced it had granted the Federal Reserve Bank of New York the authority to lend to Fannie Mae and Freddie Mac “should such lending prove necessary.” Any lending would be at the primary credit rate and collateralized by U.S. government and federal agency securities.
“This authorization is intended to supplement the Treasury’s existing lending authority and to help ensure the ability of Fannie Mae and Freddie Mac to promote the availability of home mortgage credit during a period of stress in financial markets,” the Fed said in a statement.
Additionally, the Treasury Department announced a three-step plan aimed at stabilizing the situation at Fannie Mae and Freddie Mac, both of which have seen their stock prices fall by more than 80 percent since last year:
* A temporary increase in the line of credit the GSEs have with Treasury. Treasury would determine the terms and conditions for accessing the line of credit and the amount to be drawn. The current line of credit is $2.5 billion;
* Temporary authority for Treasury to purchase equity in either of the two GSEs if needed. Use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer;
* Strengthening of GSE regulatory reform legislation currently moving through Congress by giving the Federal Reserve a consultative role in the new GSE regulator’s process for setting capital requirements and other prudential standards. Such action would require approval by Congress.
“Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies,” said Treasury Secretary Henry Paulson Jr. “Their support for the housing market is particularly important as we work through the current housing correction.”
Read the FRB Statement here.
Read Secretary Paulson’s comments here.
Insight coming as these events unfold.
