Treasury Secretary Henry Paulson made a couple of extremely big announcements this afternoon.
- The Fed will open the Discount Window to Fannie Mae and Freddie Mac for borrowing. This is the same Discount Window that was opened to Bear Sterns just a few months ago. This is intended to make the two GSE’s more liquid. This is official and has already been approved.
- The Treasury also requested Congress to increase the existing line of credit to Fannie Mae and Freddie Mac. This would need to be passed by Congress before it happens.
The US Secretary of Treasury also announced some recommendations for legislation (to be enacted as soon as possible). Here was his statement (directly from MarketWatch):
“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. Their support for the housing market is particularly important as we work through the current housing correction.
“GSE debt is held by financial institutions around the world. Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets. Therefore we must take steps to address the current situation as we move to a stronger regulatory structure.
“In recent days, I have consulted with the Federal Reserve, OFHEO, the SEC, Congressional leaders of both parties and with the two companies to develop a three-part plan for immediate action. The President has asked me to work with Congress to act on this plan immediately.
- “First, as a liquidity backstop, the plan includes 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.
- “Second, to ensure the GSEs have access to sufficient capital to continue to serve their mission, the plan includes 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.
- “Third, to protect the financial system from systemic risk going forward, the plan strengthens the 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.
“I look forward to working closely with the Congressional leaders to enact this legislation as soon as possible, as one complete package.”
Big Concerns Require Big Actions
I haven’t been too quiet on the topic. It’s obvious that Fannie and Freddie have some bad loans on their books. I was happy to hear this announcement over the weekend. Hopefully this move (and the future legislation) will help restore confidence in the credit markets. It’s become obvious (to me at least) that our government is willing to do what it takes to resolve these concerns before they turn a rough situation much worse.
What’s This Got To Do With Mortgages?
Directly?… Only time will tell with the legislation. The one thing I can say is that this announcement should build some confidence in the mortgage market and hopefully we’ll see that in the mortgage backed securities on Monday. Remember – the higher the value of a mortgage backed security, the lower the interest rate. If you’re curious what things will do – just follow me on Twitter. I’ll keep you posted.
Fed’s Move to Rescue Fannie Mae and Freddie Mac via MarketWatch
Secretary Paulson’s Statement via MarketWatch
Photo Kudos:New York Times ….This is a super cool picture!
