Latest Developments—8:30 a.m. Update

MBA (7/14/2008 ) Sorohan, Mike
Following an extraordinary weekend of news and activity in the real estate finance industry, here is an update (as of 8:30 a.m. ET) as to what is happening:
Fed, Treasury Take Action on GSEs
Both the Federal Reserve and the Treasury Department announced actions over the weekend aimed at reassuring markets of the viability of Fannie Mae and Freddie Mac and their ability to provide ongoing liquidity to the mortgage industry.

The Fed on Sunday said it has granted the Federal Reserve Bank of New York authority to lend to Fannie Mae and Freddie Mac “should such lending prove necessary.” Any lending would be at the primary credit rate and collateralized by U.S. government and federal agency securities.

“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.

Additionally, the Treasury Department announced a three-step plan aimed at stabilizing the situation at Fannie Mae and Freddie Mac, both of which have seen their stock prices fall by more than 80 percent since last year:

• A temporary increase in the line of credit the GSEs have with Treasury. Treasury would determine the terms and conditions for accessing the line of credit and the amount to be drawn. The current line of credit is $2.5 billion and served as the basis of the “implicit guarantee” that the government would guarantee GSE debt. Such action would require approval by Congress;

• Temporary authority for Treasury to purchase equity in either of the two GSEs if needed. Use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer;

• Strengthening of GSE regulatory reform legislation currently moving through Congress by giving the Federal Reserve a consultative role in the new GSE regulator's process for setting capital requirements and other prudential standards. Such action would require approval by Congress.

“Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies,” said Treasury Secretary Henry Paulson Jr. “Their support for the housing market is particularly important as we work through the current housing correction.”

MBA Reaction
Mortgage Bankers Association Chairman Kieran Quinn, CMB, issued a statement Sunday expressing support for the Fed/Treasury action.

"Fannie Mae and Freddie Mac play a critical role in the U.S. housing market,” Quinn said. “We commend both the Treasury Department and the Federal Reserve on this move as it will help ensure that the two companies can continue to play central roles in stabilizing the mortgage markets. 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.”

"I applaud Secretary Paulson and Chairman [Ben] Bernanke for their leadership and we look forward to working with Congress in the coming days to pass important legislative initiatives that will also help stabilize the market."

‘Implicit Guarantee’ No Longer Just Implicit
The Fed/Treasury statements makes concrete, in part, what until now had only been implied: that the federal government would not allow Fannie Mae and Freddie Mac to fail. Until recently, that implicit guarantee had helped keep GSE stocks healthy, as shareholders showed faith in the government’s willingness to support the GSEs.

With the weekend announcements, “the federal government has outlined explicit steps its willing to take, not only to support the debt, but to support the companies as operating institutions,” said MBA Vice President for Research and Economics Jay Brinkmann.

OFHEO Expresses Support for Plan
Office of Federal Housing Enterprise Oversight Director James Lockhart III issued the following statement in support of Fed/Treasury action:

“I support Secretary Paulson, the Administration, and the Federal Reserve in their efforts to stabilize the housing finance system.

OFHEO will continue to work with the Treasury, the Federal Reserve, the Congress and the Enterprises in addressing the current situation and to assure that the Enterprises continue to fulfill their mission. We look forward to rapid passage of GSE regulatory reform legislation.

The Enterprises’ $95 billion in total capital, their substantial cash and liquidity portfolios, and their experienced management serve as strong supports for the Enterprises’ continued operations.”

IndyMac Opens Today Under FDIC Control; Schumer Denies Role
The takeover late last week of IndyMac Bank, Pasadena, Calif., by the Federal Deposit Insurance Corp. marks one of the largest government assumptions of a financial institution. IndyMac reopens today under FDIC conservatorship.

The IndyMac takeover is in and of itself extraordinary; adding to the drama was a pointed statement by the Office of Thrift Supervision, IndyMac’s regulator, pointing the finger at Sen. Charles Schumer, D-N.Y., for causing a run on IndyMac deposits, an allegation that Schumer’s office sharply denied.

"The OTS has determined that the current institution, IndyMac Bank, is unlikely to be able to meet continued depositors’ demands in the normal course of business and is therefore in an unsafe and unsound condition,” said OTS Director John Reich. “The immediate cause of the closing was a deposit run that began and continued after the public release of a June 26 letter to the OTS and the FDIC from Senator Charles Schumer of New York. The letter expressed concerns about IndyMac’s viability. In the following 11 business days, depositors withdrew more than $1.3 billion from their accounts. This institution failed today due to a liquidity crisis. Although this institution was already in distress, I am troubled by any interference in the regulatory process."

Schumer denied interference, telling Bloomberg News, "If OTS had done its job as regulator and not let IndyMac's poor and loose lending practices continue, we wouldn't be where we are today...Instead of pointing false fingers of blame, OTS should start doing its job to prevent future IndyMacs.''

FDIC Chair Sheila Bair issued a statement seeking to reassure consumers about the developments, calling IndyMac’s conversion to FDIC control “largely a non-event.”

"The more than 200,000 customers of IndyMac with deposits of $18 billion are fully protected," Bair said. "It's important to keep in mind that the small percentage of uninsured are still covered for their insured amounts and half of their uninsured money. As assets of IndyMac are sold, they may receive even more. They have had continued access to their funds through ATMs, debit cards and writing checks over the weekend, and on Monday morning, it will be business as usual.

All bank depositors should understand that their insured deposits are safe. IndyMac is only one of 8,494 depository institutions operating throughout the country and represents only .2 percent of banking industry assets. The overwhelming majority of banks in this country are safe and sound. The chance that your own bank will be taken over by the FDIC is extremely remote. And if that does happen, you will continue to have virtually uninterrupted access to your insured deposits.”