Both the Federal Reserve and the Treasury said Sunday evening that they will take some dramatic steps to support ailing housing finance giants Fannie Mae (FNM) and Freddie Mac (FRE). In a statement, Treasury secretary Henry Paulson said he will work with Congress to increase its long-standing $2.25 billion credit line to each GSE, at least on a temporary basis; he also said the Treasury will ask Congress to allow it to buy equity in either company should market conditions warrant such a move. The Fed will also assume a more direct role in helping a new GSE regulator establish capital requirements, a process expected to be set into motion with pending Congressional approval of a sweeping housing aid package. It was unclear just how much more of a credit line the Treasury will seek, or what the definition of temporary authority would be construed as; Paulson intimated that he has been working with Congressional leaders on the plan over the weekend. A separate statement from the Fed said that it had granted the Federal Reserve Bank of New York the authority to lend to Fannie Mae and Freddie Mac should such lending prove necessary, using U.S. government and federal agency securities as collateral. Such access essentially gives the GSEs access to the discount window.
Confidence needed for Freddie’s debt sale The vote of confidence for both GSEs by key officials comes ahead of a planned $3 billion debt sale by Freddie Mac on Monday that has shaped up to be the flash point for any policy decisions around both GSEs; such debt auctions, used to replace short-term funding lines that are maturing, are just one common source of capital for Fannie and Freddie. But this particular auction is clearly coming under uncommon circumstances. After a fresh round of selling Friday that saw both GSEs’ share prices pummeled — Freddie was seen at one point trading below $4.00 — rumors emerged Friday afternoon that Fed chief Ben Bernanke had offered Freddie CEO Richard Syron access to the discount window, and as the rumor spread, shares in both battered GSEs recovered sharply from devastating lows (Freddie, in particular). Later Friday — after market close, natch — press representatives at the Fed flatly denied that any such discussion had taken place, and that any such consideration regarding aid for the GSEs was on the table. On Saturday, the Fed’s press people recanted on at least part of their denial. According to a Reuters report, the Fed admitted that both Syron and Bernanke had spoken on Friday, but held the line in suggesting that nothing was said in the call about accessing the discount window. (Now, of course, news has emerged that both troubled housing giants have access.) Rumors of Fed intervention emerged on top of a Friday report from the New York Times that put the spook into debt and MBS investors, going so far as to suggest officials were considering placing one or both GSEs into government hands via conservatorship. Numerous market participants have told HW over the weekend that the pattern of information leaks smacked of “trial ballooning,” a tactic long used by government officials to assess public reaction to a possible policy change. “Many are wondering if the administration or Congressional Republicans didn’t deliberately bobble the public relations efforts to reassure the markets in the wake of concerns that new accounting rules would increase regulatory capital needs,” said one source, an ABS analyst, in reference to a Monday report from Lehman Brothers Holdings Inc. (LEH) that served to spark the week-long downward spiral in share prices. “Notably, debt markets did not falter appreciably until news of Treasury contingency plans escalated fears from serial dilution of existing shareholder interests to fear of imminent collapse.” Freddie discusses its options Both of the GSEs and their regulator have said repeatedly that they remain well-capitalized. Freddie Mac went so far as to outline a number of options available to it in detail within a press statement on Friday — including a possible dividend cut — while disputing the accuracy of any speculation over possible conservatorship. “We believe current speculation in the media around the issue of conservatorship does not accurately reflect the facts,” the company said. “Freddie Mac is not on the threshold of conservatorship because we are adequately capitalized.” Conservatorship would be an issue only if the GSEs fell below defined critical capital levels, and neither is close to such a danger zone: taken together, Fannie and Freddie’s current capitalization is $50 billion above such a level. Freddie is also planning to raise an additional $5.5 billion in fresh capital later this year. “The preliminary indications of our expected financial performance for the second quarter, while reflecting the challenges that face the industry, do not point to an immediate need to raise additional capital,” the company said. Freddie also said it could, if it needed to, cease purchasing new mortgages with the run-off generated by refinancing activity within its retained mortgage portfolio — the GSE said that its run-off totals roughly $10 billion per month currently, and choosing not to replace that would generate $2.5 to $3 billion in fresh capital over the course of a year. Of course, taking such an approach would likely have a pretty rough side effect for the nation’s already battered housing market; Freddie’s retained portfolio reached $770.4 billion in May, including $90.1 billion in mortgage loans and $215.3 in non-agency MBS. For now, at least, it appears that such maneuvering is off the table. The real questions, however, will come Monday at market open: will investors buy all of it? And will the moves by the Treasury and Fed be enough? Disclosure: The author was long FRE and held no other positions of relevance when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.
