FHFA/Treasury in Historic Takeover of Fannie and Freddie

On Sunday morning the new GSE regulatory agency placed Congressionally chartered mortgage giants Fannie Mae and Freddie Mac into separate conservatorships, with the government committing $100 billion to each, while removing their CEOs, and laying the groundwork for a radical and historic restructuring of the entire U.S. mortgage market. As part of the GSE restructuring plan, the Treasury Department is providing capital and funding support in an effort to boost investor confidence in Fannie and Freddie's $5.2 trillion worth of debt and mortgage-backed securities. "Monday morning the businesses will open just as usual, only with stronger backing for the holders of MBS, senior debt and subordinated debt," Federal Housing Finance Agency director James Lockhart said. The Treasury has committed to purchase new Fannie and Freddie MBS, a move that will add liquidity to the mortgage bond market. It will purchase $5 billion worth of agency MBS in September alone. The FHFA dismissed Fannie CEO Daniel Mudd and Freddie chairman and CEO Richard Syron. The two men will remain on in transition roles. Herb Allison, a former vice chairman at Merrill Lynch, was named CEO of Fannie, and David Moffett, former vice chairman of U.S. Bancorp will lead Freddie. The new CEOs will be charged with examining Fannie and Freddie's "guarantee fee structure with an eye toward mortgage affordability," Treasury secretary Henry Paulson said. "The primary mission of these enterprises now will be to increase the availability of mortgage finance," he said. The FHFA director placed the GSEs in conservatorships due to their ailing financial condition and their deteriorating ability to support the mortgage market. Secretary Paulson made conservatorship a prerequisite for providing the two GSEs with quarterly capital infusions to ensure they maintain a positive net worth. "I support the director's decision as necessary and appropriate and had advised him that conservatorship was the only form in which I would commit taxpayer money to the GSEs," Mr. Paulson told reporters Sunday morning. In agreeing to a conservatorship, the GSEs each issued $1 billion in senior preferred stock to Treasury. With each capital infusion, Treasury will accumulate more preferred stock. Treasury also will be issued warrants that give the agency the right to purchase 79.9% of the common shares in each GSE. Meanwhile, the government sponsored enterprises can increase their MBS purchases by about $100 billion each. But the investment portfolios are capped at $850 billion through 2009. The senior preferred stock covenants also require the GSEs to reduce their portfolios by 10% a year starting in 2010 until the portfolios reach $250 billion. The new conservatorships will not pay dividends on common or preferred stock. The Treasury secretary advised banks and thrifts with large exposures to GSE common and preferred shares to work with their regulators in developing a capital restoration plan.