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A Letter from Cam Fine
Published: 03 September 2008

This past weekend, the U.S. Treasury placed the two housing GSEs, Fannie Mae and Freddie Mac, in conservatorship to stabilize and restore confidence in our mortgage markets. This is a historic step that will change the face of our financial system for generations to come.

Yesterday afternoon, I participated in a conference call held by senior Treasury officials and Federal Housing Finance Agency (FHFA) Director James Lockhart. They outlined the following steps taken by Treasury and FHFA:

Conservatorship: Fannie Mae and Freddie Mac were placed into immediate conservatorship by FHFA. This morning, the GSEs are expected to resume normal business operations with FHFA assuming the power of their Boards and managements. Current Fannie Mae CEO Daniel Mudd and Freddie Mac CEO Richard Styron are being replaced, but will stay on through a transition period. Herb Allison (for the last eight years chairman of TIAA-CREF and former vice chairman of Merrill Lynch) will be CEO at Fannie Mae, and David Moffett (former vice chairman and CFO of US Bancorp) will assume the CEO role at Freddie Mac. All lobbying and political activity of the GSEs will cease immediately.

Treasury Preferred Stock Purchase Agreement: Treasury has established Preferred Stock Purchase Agreements with each GSE to ensure that each maintains positive net worth. These agreements are intended to provide additional security and confidence to GSE debt holders and MBS investors. In exchange, Treasury receives a senior preferred $1 billion equity share with a 10 percent coupon in each GSE, and warrants for the purchase of common stock in each representing 79.9 percent of the common stock to protect taxpayers. Common and preferred shareholders will bear any potential losses ahead of the government's senior preferred shares. Treasury will make additional purchases of senior preferred stock if necessary to maintain positive GAAP net worth. 

Existing Common and Preferred Stock: To save $2 billion a year, dividends on common and preferred stock will be eliminated but the common and preferred shares will remain outstanding. Subordinated debt interest and principal payments will continue to be made. 

The federal banking agencies have been assessing the exposures of banks and thrifts to Fannie Mae and Freddie Mac, and believe that while many hold GSE common or preferred shares, "a limited number of smaller institutions have holdings that are significant to their capital." The agencies encourage depository institutions to contact their primary federal regulator if they believe that losses on their holdings of Fannie Mae or Freddie Mac common or preferred shares, whether realized or unrealized, are likely to reduce their regulatory capital below "well capitalized." The agencies are prepared to work with affected institutions to develop capital restoration plans consistent with capital regulations.

Secured Lending Credit Facility: Treasury has established a new secured lending credit facility, which will be available to Fannie Mae and Freddie Mac, as well as the Federal Home Loan Banks. This facility is intended to serve as an "ultimate liquidity backstop" and will expire on Dec. 31, 2009 as authorized by the Housing and Economic Recovery Act of 2008 (HERA). Collateral will be MBS issued by Fannie and Freddie and advances made by the FHLBs. Because of their good financial performance, profitability and other factors, FHFA says it is very unlikely the FHLBs will use the facility.

Treasury Program to Buy GSE MBS: To improve the availability of mortgage credit and address pressures on mortgage rates, later this month Treasury will initiate a temporary program to purchase new Fannie Mae and Freddie Mac MBS. The program will expire on Dec. 31, 2009 as authorized by HERA. 

GSE Portfolios: To promote market stability and lower the cost of funding, the GSEs will modestly increase their MBS portfolios through the end of 2009. To address systemic risk, in 2010 each GSE's portfolio will begin to gradually be reduced by 10 percent per year until it reaches $250 billion.

These actions have significant implications and will have unseen consequences for the future of our housing finance system and community banks. We can already anticipate protracted policy debates over the long-term structure and role of the GSEs, which will ultimately be determined by the Congress. Rest assured that ICBA will be there working to ensure our nation's community banks are considered in any permanent change. We have already begun our internal dialogue and will be working with all of you to determine and develop the best policy options that ensure community banks continue their vital role in our country's housing finance system.


Cam Fine
Independent Community Bankers of America President & CEO

Links to Information on Federal Takeover of Fannie Mae and Freddie Mac:

Federal Housing Finance Agency "Fact Sheet" on Questions and Answers on Conservatorship.

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