CQ TODAY ONLINE NEWS
July 13, 2008 – 9:29 p.m.
Administration Moves to Bolster Mortgage Companies
By Benton Ives, CQ Staff
The Bush administration took landmark steps over the weekend to bolster confidence in beleaguered mortgage giants Fannie Mae and Freddie Mac, though key elements of the plan would require congressional approval.
In separate announcements released before markets open on Monday, the Treasury Department and Federal Reserve said they had a plan to explicitly backstop the two companies if they run into financial trouble. The two companies have seen their share prices plummet in recent weeks, as nervous investors fretted that Fannie and Freddie could be significantly damaged by the ongoing housing slump.
As government-sponsored enterprises, or GSEs, markets have long considered Fannie and Freddie to have an implied government guarantee.
According to an outline released Sunday night, Treasury will ask Congress for the authority to increase an already existing government line of credit to Fannie and Freddie, as well as the temporary authority to buy equity in either company to ensure the financiers have access to sufficient capital.
At the same time, the Bush administration wants to include the Federal Reserve in a “consultative role” as part of a new regulator that Congress is considering establishing.
A landmark housing package now moving through Congress (
Under the Treasury plan, the Fed would consult with the to-be-established regulator on setting capital requirements “and other prudential standards” for the two companies.
The Bush administration’s plans could significantly complicate the housing package’s progress. Democrats and Republicans have battled over Fannie and Freddie for years, with Republicans generally favoring a strong regulator that could restrain their growth.
The current housing package, which the Senate bounced back to the House on Friday, represents a carefully crafted compromise hammered out by Senate Banking Chairman Christopher J. Dodd , D-Conn., and ranking Republican Richard C. Shelby of Alabama. Reopening the bill to place the Fed in an unprecedented supervisory role could prove difficult.
Dodd said the first stop in any rescue plan should be clearing the housing package. “First and foremost, we must enact the bipartisan housing bill that the Senate passed on Friday evening, and that the House of Representatives should pass in a timely manner,” he said in a statement.
Dodd said he would like to know more about the administration’s plans and expected federal regulators to come before the Banking Committee over the next few details to elaborate. “I expect these agencies to fully cooperate with the Committee and Congress so that we may work together to deliver solutions that are in the best interest of the American taxpayer and the U.S. economy,” Dodd said.
Still, early reaction was positive. “The Treasury’s plan is surgical and carefully thought out and will maximize confidence in Fannie and Freddie while minimizing potential costs to U.S. taxpayers,” Sen. Charles E. Schumer , D-N.Y., chairman of the Joint Economic Committee, said in a Sunday statement.
On Sunday, Treasury Secretary Henry M. Paulson Jr. stressed the need for quick action. “The president has asked me to work with Congress to act on this plan immediately,” he said in a statement.
Administration Moves to Bolster Mortgage Companies
“We stand ready to work with Secretary Paulson and congressional Democrats to take appropriate steps to ensure the soundness of our mortgage markets,” House Republican Leader John A. Boehner of Ohio, and GOP Whip Roy Blunt of Missouri said in a statement.
Reaction beyond the Hill was also positive. “The bold action taken by Secretary Paulson should have a very positive impact on the mortgage and broader markets. This was an important step toward strengthening investor confidence,” Securities Industry and Financial Markets Association President and CEO Tim Ryan said in a statement.
The Mortgage Bankers Association also applauded the actions outlined. “This action will ensure that consumers are able to access mortgage credit and it will reassure the capital markets that Freddie and Fannie will continue to play their vital roles providing Americans the opportunity for homeownership and affordable renting housing,” MBA Chairman Kieran P. Quinn said in a statement.
Mortgage industry consultant Howard Glaser said if the complete plan were put in place it would amount to a dramatic reversal of course for the Bush administration, which has long tried to dispel the conventional wisdom that the government would bail out Fannie and Freddie if they ran into trouble.
“If all the authority were fully implemented, the federal government would directly fund, own and lend to Fannie Mae and Freddie Mac for the first time since the companies were created,” Glaser said in a note.
Glaser said he expected Congress to move forward quickly, though some Republicans could balk at the notion of further solidifying the link between the government and Fannie and Freddie.
Still, “we expect close cooperation between Democratic leaders and the administration to move the proposed provisions as rapidly as possible,” Glaser said.
It was unclear Sunday night whether the plan would move as a stand-alone measure in Congress or if the housing bill’s managers would incorporate Treasury’s request into the existing package. Lawmakers had hoped to move the current bill to the president’s desk by mid-July, but procedural fighting over any major additions, such as the Treasury plan, could push that date past the coming August recess.
Allaying Investor Fears
The Treasury said the sweeping plans were necessary to help allay investor fears about Fannie’s and Freddie’s health.
“GSE debt is held by financial institutions around the world,” Paulson said in his statement. “Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets.
“Therefore we must take steps to address the current situation as we move to a stronger regulatory structure,” Paulson added.
Separately, the Fed said it would allow the New York Fed to lend directly to Fannie and Freddie if that step becomes necessary. “This authorization is intended to supplement the Treasury’s existing lending authority and to help ensure the ability of Fannie Mae and Freddie Mac to promote the availability of home mortgage credit during a period of stress in financial markets,” the Fed said in a statement.
Administration Moves to Bolster Mortgage Companies
All told, the new plans put the federal government squarely behind the two companies, which own or guarantee more than $5 trillion in mortgages. The Bush administration has long maintained that the companies’ massive holdings present a systemic risk to the economy.
POST A COMMENT
Oops! The following errors must be addressed: