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Fannie Mae & Freddie Mac Developments
Mon, Jul 14 2008, 09:17 GMT
by Mark Vitner
The Federal Reserve and U.S. Treasury Department announced a series of measures to bolster confidence and the liquidity position of Fannie Mae and Freddie Mac. The Federal Reserve announced Sunday night that it will allow Fannie Mae and Freddie Mac to borrow from the discount window at the primary credit rate “should such lending prove necessary.” Borrowing would be collateralized by U .S. government and federal agency securities. The Fed noted that the move is intended to supplement the Treasury’s existing lending authority.
Treasury Secretary Hank Paulson announced a “three-part plan” that includes a temporary increase in the line of credit the Government Sponsored Enterprises (GSEs) have with the Treasury; temporary authority for the Treasury to purchase equity in either of the two GSEs if needed; and asking Congress to give the Federal Reserve a consultative role in the new GSEs regulator’s process for setting capital requirements and other prudential standards.
None of these moves are a surprise, particularly in light of the well publicized but incorrect report that the Fed had opened the discount window to Fannie Mae and Freddie Mac Friday afternoon. The reports helped fuel a late day rally in the stock market and raised some questions as to what would happen when the markets re-opened Monday morning. Freddie Mac is also reportedly scheduled to sell $3 billion in short-term notes Monday.
The problems with Fannie Mae and Freddie Mac are pretty straightforward. Combined, the two GSEs have about $95 billion in capital but hold over $ 5 trillion in mortgages.1 With home prices falling and mortgage delinquencies rising, doubts are beginning to surface as to whether or not they have enough capital to ride out the housing slump. The math is pretty daunting.
Published on Mon, Jul 14 2008, 09:38 GMT
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