Treasury Pledges Greater Support for Fannie, Freddie
As HousingWire reported over the holiday weekend, the US Treasury Department updated its status on initiatives under the Housing and Economic Recovery Act. Treasury said in the announcement it would not only wind down several programs at year-end, but also amend terms of the Preferred Stock Purchase Agreements (PSPAs) for mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE). "Treasury is now amending the PSPAs to allow the cap on Treasury's funding commitment under these agreements to increase as necessary to accommodate any cumulative reduction in net worth over the next three years," the Treasury said in a statement. "At the conclusion of the three year period, the remaining commitment will then be fully available to be drawn per the terms of the agreements." The PSPAs as they stood previously allowed up to $200bn for each firm, although Freddie claimed only $51bn and Fannie only $60bn as of Q309. In addition to granting potentially more support than the $200bn per institution allowed before under the PSPAs, Treasury also amended the PSPAs to grant more "flexibility" for Fannie and Freddie to reduce their mortgage portfolios. The portfolio reduction requirement for 2010 and beyond will be applied to the maximum allowable size of the portfolios, $900bn per institution, rather than the actual size of the portfolio at year-end 2009. Treasury also said it will alter the definitions of mortgage assets and indebtedness to relieve some of Fannie and Freddie's burden in complying with the PSPAs and to make the firms more transparent with coming accounting changes. Researchers at Barclays Capital said over the weekend the discontinuation of the Treasury's purchase of mortgage-backed securities (MBS) and the secured lending facility were not only expected as part of the Treasury's announcement, but needed to mitigate risk of unplanned receivership of the firms. But the Treasury's announcement also carries significant accountancy implications for the firms. "The definition of 'mortgage assets' counted against the caps now explicitly states that it ignores changes made by FAS 166/167," BarCap researchers noted. "That is, MBS guarantee-related assets and liabilities which will be consolidated onto FNM/FRE balance sheets will not count towards the portfolio caps." Write to Diana Golobay. The author held no relevant investment positions.