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Fannie, Freddie Given Temporary Line of Credit
To help shore up Fannie Mae and Freddie Mac and boost confidence in the two housing finance institutions after their share prices plunged earlier this month, the housing stimulus package approved by Congress includes a Treasury-led proposal that will temporarily expand the government’s line of credit to Fannie and Freddie and permit the Treasury to purchase an equity stake in the companies through the end of 2009.
In addition, the Federal Reserve would also be given a supervisory role over the two government sponsored enterprises (GSEs).
“Our proposal was not prompted by any sudden deterioration in conditions at Fannie Mae or Freddie Mac,” Treasury Secretary Henry Paulson said when he announced the plan. “OFHEO has reaffirmed that both GSEs remain adequately capitalized. At the same time, recent developments convinced policymakers and the GSEs that steps are needed to respond to market concerns and increase confidence by providing assurances of access to liquidity and capital on a temporary basis if necessary,” he said.
“The plan we announced will strengthen our financial system as we weather this housing correction and establish a new world-class regulator for the GSEs,” Paulson said. “Let me stress that there are no immediate plans to access either the proposed liquidity or the proposed capital backstop. If either of these authorities is used, it would be done only at Treasury's discretion, under terms and conditions that protect the U.S. taxpayer and are agreed to by both Treasury and the GSE.”
The measure gives the Treasury secretary the authority to increase the already existing line of credit to Fannie and Freddie for the next 18 months, as well as giving the Treasury Department standby authority to buy stock in these companies to provide confidence in the GSEs and stabilize housing finance markets.
Should the GSEs tap into this credit line, the legislation provides that taxpayers should be the first in line to be paid back, before other shareholders.
While Fannie Mae and Freddie Mac each currently meet the capital and liquidity requirements set by their regulator, the Administration felt this new standby authority was necessary to increase market confidence and enable both of these institutions to continue to raise capital and maintain the availability of mortgage credit.
The Congressional Budget Office says that “there is a significant chance — probably better than 50% — that the proposed new Treasury authority would not be used before it expired at the end of December 2009.” CBO estimates that, if used, the federal budgetary cost of this proposal would be $25 billion over fiscal years 2009 and 2010.
The bill requires the Treasury Secretary to make an emergency designation before using the authority, certifying that he is acting to provide stability to financial markets, prevent disruptions in the availability of mortgage finance, protect taxpayers and facilitate an orderly restoration of private markets. The bill further specifies that GSE agreement is a prerequisite for any Treasury purchases.
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