WASHINGTON (Reuters) - The U.S. government on Sunday announced a takeover of the two mortgage giants Fannie Mae and Freddie Mac to help support the ailing U.S. housing market and economy, in what could be the largest financial bailout in the nation’s history.
KEY POINTS OF THE PLAN:
FEDERAL HOUSING FINANCE AGENCY (FHFA) IS NEW MANAGER:
The two government sponsored enterprises (GSEs) are placed into conservatorship and will be managed by their current regulator, the FHFA on a temporary basis.
The new chief executive of Fannie Mae will be Herb Allison, from pension fund TIAA-Cref and Merrill Lynch, replacing Daniel Mudd. The new ceo of Freddie Mac will be David Moffett from US Bancorp.
Monday morning the businesses will open as normal, only with stronger backing for the holders of MBS, senior debt and subordinated debt.
Both Fannie and Freddie will be allowed to grow their guarantee mortgage backed securities books without limits and continue to purchase replacement securities for their portfolios, about $20 billion per month without capital constraints.
US TREASURY WILL TAKE SENIOR PREFFERED STOCK IN BOTH GSE’S,
POTENTIALLY UP TO $100 BLN, AND COULD BUY UP TO 80 PCT OF THE
COMMON SHARES:
The U.S. Treasury has committed to buy Senior Preferred Stock in each GSE to maintain their capital and provide security for senior and subordinated GSE debt holders and to help stabilize the GSE mortgage-backed securities market.
This senior preferred stock will be senior to all other preferred stock, common stock or other capital issued by the GSEs. In order to conserve over $2 billion in capital every year, the common stock and preferred stock dividends will be eliminated. Subordinated debt interest and principal payments will continue to be made.
The GSE’s common stock and existing preferred shareholders will bear any losses ahead of the government.
The Treasury will initially purchase an upfront $1 billion worth of senior preferred stock in each GSE, with a 10 percent coupon and paying quarterly dividend. It will also receive warrants for the purchase of common stock representing an ownership stake of 79.9 percent in each GSE going forward, and receive a quarterly fee from the GSEs starting in 2010.
Treasury could buy up to $100 bln senior preferred stock in each GSE going forward, an amount chosen to demonstrate a strong commitment to the GSEs’ creditors and mortgage backed security holders. This number is unrelated to the Treasury’s analysis of the current financial conditions of the GSEs.
If the Federal Housing Finance Agency determines that a GSE’s liabilities have exceeded its assets under generally accepted accounting principles, Treasury will contribute cash capital to the GSE in an amount equal to the difference between liabilities and assets.
The senior preferred stock shall not be entitled to voting rights. In a conservatorship, voting rights of all stockholders are vested in the conservator.
US TREASURY WILL BUY GSE MORTGAGE BACKED SECURITIES IN OPEN
MARKET:
Treasury purchase GSE mortgage-backed securities (MBS) in the open market to broaden access to mortgage funding for current and prospective homeowners as well as to promote market stability.
The U.S. Treasury expects to purchase $5 billion of mortgage backed securities from Fannie Mae and Freddie Mac within the next month. Additional purchases will be made as deemed appropriate.
TREASURY SET UP A NEW CREDIT FACILITY FOR THE FEDERAL HOME LOAN BANKS (FHLBs) AND FANNIE AND FREDDIE:
A new Government Sponsored Enterprise Credit Facility (GSECF) was announced that will provide secured funding on an as needed basis by the Treasury Secretary.
Fannie Mae, Freddie Mac, and the Federal Home Loan Banks are eligible to borrow under this program if needed until December 31, 2009 as mandated by Congress in July.
Funding will be provided directly by Treasury from its general fund held at the Federal Reserve Bank of New York
(FRBNY).
The rate on a loan request ordinarily will be based on the daily LIBOR fix for a similar term of the loan plus 50 basis points (LIBOR +50 bp). The rate is set at the discretion of the Treasury Secretary with the objective of protecting the taxpayer, and is subject to change.
New York Treasury Desk, 1-646-223-6300
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