Housing Advocates Support GSE Plan

WASHINGTON - State housing finance authority officials and housing market experts yesterday expressed support for the Treasury Department's plan for taking over Fannie Mae and Freddie Mac, saying it will stabilize the overall housing market. John Craford, executive vice president of finance and administration for the Connecticut Housing Finance Authority, said the takeover should ease concerns throughout the housing market, which will benefit housing finance agencies.

"I think the impact on us is - at least in the intermediate term assuming it works - it presumably stabilizes the housing market," Craford said. "It helps housing prices stabilize, so it sort of helps everybody."

Craford said the takeover will quell some of the apprehension in the market, which could also bolster housing finance agencies' ability to sell their bonds going forward.

Housing advocates said the long-term effect of the government's conservatorship remains to be seen because it's still unclear what will happen to the two mortgage giants going forward.

John C. Murphy, executive director of the National Association of Local Housing Finance Agencies, said it is a bit premature to say with certainty what the move will mean to housing agencies, but that the takeover implies that the companies will continue to be a force in the housing market in the near term.

"I think it's going to be business as usual," Murphy said. "But I think we're just going have to wait and see what happens."

Market participants had been concerned earlier this year that the growing financial troubles of Fannie Mae and Freddie Mac would lead the two government-sponsored enterprises to dump their holdings of tax-exempt housing bonds.

"[The takeover] will render that less likely because they're not going to be quite so desperate to raise capital ... to stave off some event like this from happening," Craford said. "If they felt the pressure to liquidate, that could have made it more difficult for us to sell more housing bonds now. But I think this will alleviate that pressure. That's probably a plus."

Meanwhile, housing and market analysts said the takeover plan will stabilize prices in the housing market and probably lower prices for muni housing bonds., adding that the plan will put short-term downward pressure on Treasury and municipal bond prices as the government protection is expected to ease credit risk on the agency debt. But the analysts said the rescue effort will have long-term benefits for muni bonds, particularly for the housing bond market, as mortgage rates are expected to come down once the plan takes effect.

The Treasury plan will not have a huge impact on the muni market because the two government-sponsored entities have not been major buyers of munis since 2006. Fannie Mae completely halted its purchases of muni bonds in May 2005 after it bumped up against the 2% de minimis tax rule.

Federal Reserve Flow of Funds statistics for 2008 show that muni holdings the GSEs held $39.7 billion of munis in 2005, then $36.1 billion in 2006, falling to $33.3 billion in 2005 and $32.4 billion in 2008. The statistics represent the holdings of seven GSEs, including the Federal Home Loan Banks, the Federal Agricultural Mortgage Corp., the Farm Credit System, and Resolution Funding Corp., but sources said that the lion's share of those muni bonds are held by Fannie and Freddie.

However, the two have been among the top 25 credit enhancers in the muni market this year, with Freddie Mac enhancing some $1.46 billion in debt, while Fannie Mae enhanced than $1.32 billion, according to data from Thomson Reuters.

The muni market is expected to follow Treasuries, market participants said. Munis will likely fall in price in the short term as investors reverse the flight-to-quality that had kept Treasury prices high during the year-long credit crisis because the investors will be more comfortable with the overall market. Treasury yields may also rise if the federal government increases its borrowing to fund its take over plan, market participants said.

The plan is expected to benefit the housing market by providing liquidity for the GSEs to increase their mortgage buying power. Both companies have limited their mortgage buying because of their low capital holdings and because of regulatory efforts.

"As the GSEs have grappled with their difficulties," the government liquidity efforts "can aid mortgage affordability," Treasury Secretary Henry Paulson said Sunday.

In a conference call yesterday afternoon, Senate Banking Committee chairman Sen. Christopher Dodd, D-Conn., said he will hold a hearing this week to get Paulson to answer questions about the takeover. Dodd said he is "not opposed" to the takeover plan, but said he is more anxious about Paulson's plan than he was in July when the Treasury Secretary pushed to provide liquidity to the two GSEs.

The four-part takeover plan was announced by Paulson and the director of the Federal Housing Finance Agency James Lockhart Sunday. Under the plan, the FHFA will take over management of the two government-sponsored entities as a conservator by replacing the chief executives of both companies.

The Treasury will provide liquidity for the GSEs to increase their ability to buy mortgages while assuming control of the companies. The Treasury will receive $1 billion of senior preferred stock, a unique class of stock, from each GSE as compensation for its assistance. This will include warrants for the purchase of up to 79.9 percent of the common stock of each GSE on a fully-diluted basis at a nominal price.

Additionally, the GSEs must increase their mortgage-backed securities portfolios through the end of 2009 to stimulate mortgage lending, and then gradually reduce by 10% per year the size of their portfolios beginning in 2010. The Treasury will establish a new secured lending credit facility available to Fannie, Freddie, and the Federal Home Loan Banks. The facility is intended to provide the liquidity backstop authority that was granted to the Treasury by Congress in July.

Lastly, the Treasury will begin buying GSE mortgage-backed securities later this month. Paulson said that the Treasury will hold any securities it buys until maturity and "there is no reason to expect taxpayer losses from this program."

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