This past weekend, the U.S. Department of Treasury placed Fannie Mae and Freddie Mac -- the Government Sponsored Enterprises (GSEs) -- into a government conservatorship, taking over the day-to-day management of the two agencies. Treasury Secretary Paulson stated that these historic actions are necessary to strengthen the housing market, restore confidence in the investor community and prevent further deterioration of financial markets. I believe this represents a positive step forward in dealing with the housing crisis and should enable us to better serve our customers by improving liquidity and moderating mortgage rates.
 
The GSEs are critical to the overall housing market and more specifically, the mortgage industry. Together, they own or guarantee approximately $5.2 trillion in mortgage loans – about half of the nation’s total. Their role is critical to our business strategy since many of the mortgage loans we originate are eventually sold to the GSEs.
 
Fannie and Freddie also play a significant role in the investor community since many individuals, companies and foreign investors own mortgage backed securities (MBS) issued by the GSEs. Government backing restores confidence and ensures that global financial markets will continue to provide market liquidity, which could expedite stabilization in the credit and housing markets. Included in the overall plan are four key points:
 
   The GSEs will be permitted to modestly increase the size of their MBS
   portfolios through the end of 2009. This should promote liquidity in
   the secondary mortgage market with the objective of lowering mortgage
   rates that have been impacted by the financial concerns about the GSEs.
   Over time, to address this systemic risk, their portfolios will
   gradually be reduced and eventually stabilize at a lower, less-risky
   size.
 
   The Treasury and the Federal Housing Finance Agency (successor to OFHEO
   under the recently enacted Omnibus Housing Bill) have established
   Preferred Stock Purchase Agreements. These are contractual agreements
   between the Treasury and the GSEs that provide the Treasury with a
   preferred stock position in the GSEs, ahead of existing common and
   preferred shareholders. Under these agreements, the Treasury will
   ensure each company maintains a positive net worth. In addition, these
   agreements promote market stability by providing added security to GSE
   debt holders and support mortgage availability by providing additional
   investor confidence in GSE mortgage-backed securities.
 
   The Treasury has established a new secured lending credit facility that
   will be available to Fannie Mae, Freddie Mac and the Federal Home Loan
   Banks. This facility is intended to serve as an ultimate liquidity
   backstop, implementing the temporary liquidity backstop authority
   granted by Congress to the Treasury in July 2008 and will be available
   until December 2009.
 
   The Treasury is initiating a temporary program to purchase GSE MBSs.
   Currently, the GSE portfolios are constrained by their own capital
   situation and by regulatory efforts to address systemic risk. As a
   result, we’ve seen mortgage rate spreads widen relative to U.S.
   Treasuries, making mortgages less affordable for homebuyers. While the
   GSEs are expected to moderately increase the size of their portfolios
   over the next 15 months through prudent mortgage purchases,
   complementary government efforts may aid overall mortgage affordability.
   This program will expire in December 2009.
 
Many experts believe this takeover will lead to lower mortgage rates, which would be good news for homebuyers and those hoping to refinance. Lower rates would attract more homebuyers into the market and help stabilize and possibly raise home values. With lower mortgage rates, it is possible that some borrowers in default may be able to modify their loans and avoid foreclosure. As previously noted, this action may expedite the housing recovery, but it still will take time.
 
Early stock market response is very favorable and suggests that the government’s actions are appropriate and helpful. In these troubled times, it is difficult to predict the future, but elements are in place to see improvement.