In response to market turmoil and unsubstantiated rumors about the continued viability of Fannie Mae and Freddie Mac, the U.S. Government took action to make clear that the two government sponsored enterprises (GSEs) will not be allowed to fail.
On Sunday, July 13, 2008, the Federal Reserve Board announced authority for the Federal Reserve Bank of New York to make secured loans to the GSEs, if necessary. The Fed took a similar step for investment banks at the time of the Bear Stearns failure. The same day, Treasury Secretary Paulson announced three legislative proposals:
1. Temporary authority for the Treasury Department to make direct loans to the GSEs.
2. Temporary authority for the Treasury Department to purchase stock of the GSEs. The stock is expected to have priority status over existing classes of GSE stock.
3. A permanent requirement that the new GSE regulator (the successor to the Office of Federal Housing Enterprise Oversight (OFHEO)) must consult with the Fed on GSE capital requirements and all other safety and soundness standards for the operation of the GSEs. This authority strengthens the hand of the new regulator by putting the prestige and power of the Fed behinds its policies, but it weakens the regulator by giving the Fed an important policy role. GSE and government officials are both on the record saying that they see no current need for the GSEs to borrow from the Fed or the Treasury or for Treasury to buy stock in the GSEs.
This article appeared in the National Association of Realtors Weekly Washington Report dated 7-21-08
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