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Investors, Policymakers Respond to GSE Rescue
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Shares of Fannie Mae and Freddie Mac fell dramatically
while their mortgage bonds soared following the federal takeover of the
mortgage-finance companies that upholds a federal guarantee of the
firms' bonds. The White House said the rescue plan will help the
housing market recover and give Congress and the next administration
time to determine the government-sponsored enterprises' future.
Treasury Secretary Henry Paulson told CNBC the GSEs' dual
public-private housing finance mission was structurally flawed. Paulson
reiterated that the banking agencies will work with the limited number
of financial institutions that have significant holdings of GSE common
or preferred stock compared to capital.
The Treasury secretary also said there are reasonable scenarios in
which the housing market recovers while GSE preferred and common shares
retain their value. He said he could not estimate the cost of the
takeover for taxpayers and said government purchases of mortgage-backed
securities is a temporary measure that will instill confidence in the
mortgage market.
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Government Announces GSE Rescue
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The Treasury Department and Federal Housing Finance Agency announced
a federal rescue of government-sponsored enterprises Fannie Mae and
Freddie Mac. The government will take the mortgage-finance giants into
conservatorship, allowing their stock to continue trading.
The Treasury Department said it will take a $1 billion equity stake in
senior preferred stock in each company. That stock would rank above
existing preferred and common shares. The agency will buy additional
preferred stock from the GSEs if necessary to maintain their positive
net worth, and it may purchase common stock.
"Fannie Mae and Freddie Mac are critical to turning the corner on
housing," Treasury Secretary Henry Paulson said. "Nothing
about our actions today in any way reflects a changed view of the
housing correction or of the strength of other U.S. financial
institutions."
The Treasury
Department announced a program to buy mortgage-backed securities held
by Fannie and Freddie to inject funding into the mortgage market. The
agency also established a new secured lending credit facility available
to Fannie, Freddie and the Federal Home Loan Banks. The facility is
intended to serve as an "ultimate liquidity backstop" and
will expire on Dec. 31, 2009, as authorized by the Housing and Economic
Recovery Act of 2008 approved in July. Collateral will be
mortgage-backed securities issued by Fannie and Freddie and FHLB
advances. The FHFA said it is unlikely the FHLBs will use the facility.
FHFA Director
James Lockhart said the agency intends to operate the GSEs so they can
return to "normal business operations." The FHFA announced
new executives for the GSEs and released a fact sheet to answer
questions about conservatorship.
"This is a
historic step that will change the face of our financial system for
generations to come," said ICBA President and CEO Cam Fine.
"We can already anticipate protracted policy debates over the
long-term structure and role of the GSEs, which will ultimately be
determined by the Congress."
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FDIC Makes Mortgage Recommendations
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The FDIC released highlights from its Forum on
Mortgage Lending for Low- and Moderate-Income Households. The purpose
of the forum was to explore a framework for future LMI mortgage
lending.
The FDIC encouraged basic, traditionally underwritten, 30-year
fixed-rate mortgages for the majority of LMI borrowers, and it said
offering all parties a long-term stake in mortgage outcomes will
improve their quality. The agency also supported alternative
underwriting processes for consumers with limited credit history and
innovative insurance products to address temporary income disruptions.
ICBA's Community Banks Common Sense Lenders Web center offers a variety
of resources community banks can use to demonstrate that they are
responsible lenders that have avoided problems in the subprime market.
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MSN Report Backs Community Banks
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An MSN Money article reported that
smaller banks frequently offer fewer fees and higher interest rates
than the largest financial institutions. According to George Washington
University professor Arthur Wilmarth Jr., the 10 largest banks generated
54 percent of revenue from fees and service charges in 2006, compared
with 28 percent at the 10 smallest banks. The report also cites FDIC
data that show the largest banks paid an average of 1.87 percent
interest for savings accounts, while the smallest banks paid 4.37
percent.
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FDIC Report Features Deposit Insurance
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The FDIC Ombudsman's August report features several
agency resources on deposit insurance. The report links to online
tools, including brochures, videos and seminars, community banks and
consumers can use to increase public awareness of deposit insurance
protections. ICBA also offers safety and soundness tools on its Safety of Community Bank
Deposits resource center.
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