Under a new plan announced by Treasury Secretary Henry Paulson and James Lockhart, head of the Federal Housing Finance Agency (FHFA), Fannie Mae and Freddie Mac have been seized by the U.S. government and will be run by the FHFA indefinitely. According to Lockhart, the action follows extensive stress-testing and analysis, and addresses critical soundness concerns.
‘After this exhaustive review, I have determined that the companies cannot continue to operate safely and soundly and fulfill their critical public mission, without significant action to address our concerns,’ states Lockhart. ‘Therefore, in order to restore the balance between safety and soundness and mission, FHFA has placed Fannie Mae and Freddie Mac into conservatorship.
‘That is a statutory process designed to stabilize a troubled institution with the objective of returning the entities to normal business operations,’ he explains. ‘FHFA will act as the conservator to operate the enterprises until they are stabilized. The boards of both companies consented yesterday to the conservatorship.’
According to Lockhart's statement, the government-sponsored enterprises (GSEs) will be allowed to grow their guarantee mortgage-backed securities (MBS) books without limits and purchase replacement securities for their portfolios. In addition, the present CEOs of Fannie Mae and Freddie Mac have been replaced by Herb Allison and David Moffett, respectively.
Common stock and preferred stock dividends will be eliminated in order to preserve capital, while common and all preferred stocks will still remain outstanding, and subordinated debt interest and principal payments will still be issued. Lockhart adds that lobbying and other political activities have been immediately halted, and charitable activities will be reviewed.
‘The goal of these actions is to help restore confidence in Fannie Mae and Freddie Mac, enhance their capacity to fulfill their mission and mitigate the systemic risk that has contributed directly to the instability in the current market,’ he notes. ‘The lack of confidence has resulted in continuing spread widening of their MBS, which means that virtually none of the large drop in interest rates over the past year has been passed on to the mortgage markets.’
The news was met with approval by the Mortgage Bankers Association. ‘I applaud Secretary Paulson and Director Lockhart for taking crucial steps to ensure that Fannie Mae and Freddie Mac can continue to play their critical role of providing liquidity to the housing finance system, thus providing Americans the opportunity for homeownership and affordable rental housing,’ says John A. Courson, chief operating officer of the MBA.
‘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,’ he adds.
For more on the GSE takeover, please see today's MortgageOrb Blog View, titled ‘Time For A New Glass.’
Sources: Federal Housing Finance Authority, Mortgage Bankers Association
