Fannie, Freddie Uncertainty Prompts Action from Regulators

By Sarah Borchersen-Keto, CCH Washington News Bureau.

In a move designed to shore up confidence in Fannie Mae and Freddie Mac, the Federal Reserve Board announced on July 13 that it will seek authority from Congress to allow the government sponsored enterprises (GSEs) to have the ability to borrow from the Federal Reserve Bank of New York should it be necessary. The Fed explained that any lending would be at the primary credit rate and collateralized by government and federal agency securities. The move is intended to supplement the Treasury Department’s existing lending authority.

Treasury Secretary Henry Paulson noted that in addition to granting the Fed the authority to lend to Freddie and Fannie, the proposed plan also would grant temporary authority for the Treasury Department to purchase equity in either of the companies if necessary. Use of either the line of credit with the Fed or the Treasury Department equity investment would carry terms and conditions needed to protect the taxpayer.

In addition, the plan seeks to strengthen the GSE regulatory reform legislation currently moving through Congress by giving the Fed a consultative role in the new GSE regulator’s process for setting capital requirements and other standards. Paulson said he will work closely with Congress to enact the legislation as soon as possible, and as one complete package.

Response

Fannie Mae President and CEO Daniel H. Mudd said that, given the market turmoil, “having options to access provisional sources of liquidity if needed will help to strengthen overall confidence in the market.” Mudd said Fannie continues to hold “more than adequate” capital reserves. Freddie Mac Chairman Richard F. Syron added that the company’s June 30, 2008, results are expected to show a substantial capital cushion above the 20-percent mandatory target surplus established by the Office of Federal Housing Enterprise Oversight.

Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., said he will invite Paulson, Fed Chairman Ben Bernanke and Securities and Exchange Commission Chairman Christopher Cox to come before the committee to provide Congress and the public with more information on their plans.

Presidential Support

In a July 15 White House press briefing, President Bush stressed that action to support Fannie Mae and Freddie Mac should not be considered a bail-out and that both of the GSEs should continue as shareholder-owned companies. Bush explained that in the case of Fannie and Freddie, “there is a feeling that the government will stand behind mortgages through these two entities. And therefore, we felt a special need to step up and say that we are going to provide, if needed, temporary assistance through either debt or capital.”

Asked whether Fannie and Freddie should both be privatized and subject to normal business rules, Bush replied that the first step is to make sure there is confidence and stability in the mortgage markets. The second step would be to have a regulator in place. “Hopefully these measures will instill the confidence in the people. And we’ll see how things go . . . these need to remain private enterprises, and that’s what our message is” Bush added.

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