Saved by the Fed
Monday, 8 September 2008 1:00pm
Troubled mortgage giants Fannie Mae and Freddie Mac will be reborn in a four-pillar strategy put forward by the US government - a move that brought fast relief to the credit markets.
After more than a month of deliberations, the Treasury, the Federal Reserve and the Federal Housing Finance Agency (FHFA) will all take the lead role in ensuring Fannie Mae and Freddie Mac remain operational and financially stable despite the heavy bleeding both institutions have suffered due to the US mortgage crisis.
As opposed to merely injecting fresh equity in the twin giants, the US government will instead adopt a four-pronged approach which includes a change in top management, increased funding in MBS portfolios, a new secured lending facility and a preferred stock purchase program.
Put another way, the government will do it all can to alleviate local and global concerns of a possible worsening of the US economy should the mortgage industry collapse, and, more importantly, a complete re-focusing of Fannie Mae and Freddie Mac from agencies that aim to maximise profits to being completely focused on capital preservation.
"Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner on housing. Therefore, the primary mission of these enterprises now will be to proactively work to increase the availability of mortgage finance, including by examining the guaranty fee structure with an eye toward mortgage affordability," said Jim Lockhart, director of FHFA, in a statement.
"I attribute the need for [today's] action primarily to the inherent conflict and flawed business model embedded in the GSE structure, and to the ongoing housing correction," he added.
Local and global equities are buoyed by the news while the iTraxx indices, a barometer of the credit market's health, also responded positively.
Michelle Baltazar
This story was found at: http://www.financialstandard.com.au/news/view/23962
Printed: Tuesday, 6 January 2009 3:53pm