Magazine article Mortgage Banking

Fed and Treasury Roll out Fannie, Freddie Backstop Plan

Magazine article Mortgage Banking

Fed and Treasury Roll out Fannie, Freddie Backstop Plan

Article excerpt

The Federal Reserve and the Treasury Department announced in mid-July an extraordinary series of steps designed to act as a contingency backstop for the two government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, in the wake of plummeting stock shares and shaken investor confidence. Several top government officials as well as the safety and soundness regulator for the GSEs sought repeatedly to reassure the markets there was no imminent need to resort to the steps envisioned by the plan.

The joint Fed/Treasury action was announced on July 13, two days after federal regulators took over Pasadena, California-based Indymac Bank and one day prior to the Fed's rollout of tighter revised HOEPA rules.

Under the plan, the Fed said it has granted the Federal Reserve Bank of New York the authority to lend to Fannie Mae and Freddie Mac "should such lending prove necessary."

Furthermore, "Any lending would be at the primary credit rate and collateralized by U.S. government and federal agency securities," said the Fed. "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."

Meanwhile, in concert with the Federal Reserve, Treasury Secretary Henry M. Paulson Jr. announced a three-part plan to bolster the GSEs, starting with a temporary increase in the line of credit both enterprises have with Treasury as a liquidity backstop. Treasury would determine the terms and condi tions of 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 the Treasury Department to purchase equity in either of the two GSEs, if needed. Use of either the line of credit or the equity investment option would carry terms and conditions necessary to protect the taxpayer, explained Paulson.

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. …

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