From The Commercial Mortgage/Real Estate Hotline: http://commercialmortgagehotline.blogspot.com
Sunday, September 7, 2008
The need for the events of yesterday morning to re-open the mortgage markets for home purchases and refinance was discussed in this blog on August 27th.
This morning an announcement was made by the Secretary Of The Treasury that Fannie Mae and Freddie Mac were being put into conservatorship because they are not capable of operating in a safe and productive manner on their own. The "takeover" of these agencies that have previously acted with an implicit government guarantee will now provide them with the explicit backing of the U.S. Government. This is a huge and unprecedented deal.
It is hoped that these critically important conduits for the mortgage industry can now resume providing the liquidity to the markets that is their lifeblood. Are happy days here again? This development certainly goes a long way towards helping to bring them back. We are not out of the woods, but will hopefully soon be able to see the light at the end of the tunnel.
While I am not sure that I would want to be an owner of Fnm or Fre common stock right now, this takeover should allow mortgage rates to begin to reflect the drop in interest rates that they have not to date. The commentary below gives a full description of what has taken place.
Commentary Provided By Liz Ann Sonders, Senior Vice President, Chief Investment Strategist, Charles Schwab & Co., Inc.In a bold move to avert potential financial disaster, the U.S. federal government is taking control over the government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. In a just-concluded press conference, Treasury Secretary Henry Paulson said the actions were being taken because the GSEs "are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe. This turmoil would directly and negatively impact household wealth; from family budgets, to home values, to savings for college and retirement. A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance. And a failure would be harmful to economic growth and job creation."
It comes after the biggest leap in mortgage defaults and delinquencies in over 30 years threatened to bring down the GSEs, which own or guarantee nearly half of the $12 trillion in U.S. home loans. Losses at the mortgage giants began growing late last year with the companies recording nearly $15 billion in combined net losses, eating into their capital. Paulson noted: Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner on housing."
The plan is to put Fannie and Freddie into conservatorship, reflecting the companies' inability to "operate safely and soundly and fulfill their critical public mission without significant action to address our concerns," said Federal Housing Finance Agency (FHFA) Director James Lockhart. The government plans to make periodic injections of funds by buying convertible preferred shares or warrants in the companies as needed, avoiding large up-front taxpayer costs. The Treasury will purchase up to $100 billion of senior-preferred stock in each company as needed to maintain a positive net worth. It will also provide secured short-term funding to the GSEs and 12 federal home-loan banks, and purchase mortgage-backed debt in the open market in order "to broaden access to mortgage funding for current and prospective homeowners."
It is undoubtedly the biggest step to date in the Bush administration's efforts to tackle the credit crisis that has resulted in more than $500 billion in writedowns for lenders, eclipsing the Fed-supported financing to prevent Bear Stearns from collapsing. About this latest GSE deal, House Financial Services Committee Chairman Barney Frank said: "This is no bailout, particularly for the shareholders." The federal government "will be senior to all shareholders, preferred and common." That said, the Federal Reserve issued a statement today saying that "a limited number of smaller institutions" have significant holdings of common or preferred stock shares in Fannie and Freddie, and that regulators were "prepared to work with these institutions to develop capital-restoration plans." The two companies had about $36 billion in preferred shares outstanding as of June 30, according to the Securities and Exchange Commission.
Over the weekend, Paulson met with Federal Reserve Chairman Ben Bernanke, Lockhart, Fannie Mae CEO Daniel Mudd and Freddie Mac CEO Richard Syron to discuss the plan. Bernanke participated because the Federal Reserve was given a consultative role in overseeing the GSEs' capital under legislation approved in July. The GSEs have operated as private shareholder-owned corporations for nearly 40 years.
Morgan Stanley was recently hired to analyze the companies' financial situation (Bank of America also consulted) and they concluded that both companies (though to a greater degree with Freddie) have been relying on accounting maneuvers to meet their capital requirements. Though it wasn't illegal, the maneuvers overstated the value of their actual reserves.
The common and preferred stockholders will get the short-end of the stick on the deal while the CEOs of both companies will be departing, after a transition period during which they will consult on the process. Herb Allison, formerly of TIAA-Cref will take over as Fannie's new CEO, while David Moffett, formerly of U.S. Bancorp will take the reigns at Freddie.
The FHFA will operate the conservatorship, aiming to "preserve and conserve" the companies' assets and property and put them "in a sound and solvent condition," according to the Treasury's fact sheet. There is "no exact time frame" for when the conservatorship will end, the statement said. The decision comes after weeks of comments by Paulson saying he was not likely to use taxpayer money to support the companies.
