Freddie mac as parallel gses with similar structures

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Freddie Mac as parallel GSEs, with similar structures, privileges, responsibilities, and limitations; lodged prudential regulation with HUD to ensure their solvency 1992: The Federal Housing Enterprises Financial Safety and Soundness Act (FHEFSSA) Creation of the Office of Federal Housing Enterprise Oversight (OFHEO), which was lodged in HUD, as prudential regulator of the GSEs; specified a risk-based capital regulatory regime but with more generous terms than for private financial firms 1992: FHEFSSA Specified for the first time a set of “mission goals” for the GSEs to support housing for low- and moderate-income households, as well as a special “affordable goal” and serving “underserved areas” (formerly inner-city areas), effectively giving the GSEs a mandate to purchase low-quality mortgages 1992-2003 Steady increase in the proportion of GSE balance-sheets mandated to serve the affordable housing goals 2003-2004 Accounting scandals at Freddie Mac and Fannie Mae lead OFHEO to impose restrictions on leverage and size of balance- sheets, but without any limit on MBS guarantee business 2003-2007: “Race to the bottom” Non-GSE MBS (privately securitized) grew from 12% to 38% of originations; GSE profitability (in return on equity terms) eroded while that of investment banks (and their leverage too) sky-rocketed; GSE and private- label MBS both grew substantially with general deterioration of lending and underwriting standards 2007-2008 At the advent of the crisis, the FHLB System becomes the “next-to-last lender of last resort” for commercial banks increasing its lending from $235 billion to $1.3 trillion, exceeding the individual on-balance sheet positions of Fannie Mae and Freddie Mac July 2008: The Housing and Economic Fannie Mae and Freddie Mac’s share
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143 Recovery (HERA) Act valuations collapse with imminent bankruptcy; The U.S. Treasury granted emergency powers under the HERA to deal with Fannie and Freddie’s problems; and HERA raised the Treasury’s debt ceiling by $800 billion, to have the flexibility to support the GSEs September 7, 2008 The GSE’s are placed in government “conservatorship” with a line of credit of up to $100 billion each for Fannie Mae and Freddie Mac 2009 The Treasury first increased its commitment to $200 billion for Fannie Mae and Freddie Mae each in May 2009, then quietly removed the ceiling on the bailout altogether on Christmas Eve 2009, promising to make up any further negative net worth in 2010, 2011, and 2012 Jan 2009-May 2010 The Federal Reserve doubles its balance-sheet via “quantitative easing” linked to GSE securities: $1,250 billion of GSE MBS and $172 billion in their debt August 2010 GSEs run cumulative losses of close to $150 billion, projected to make double the loss with a worst-case estimate of $1 trillion; Obama administration holds a “conference” to assess possible proposals for GSE reforms
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144 End Notes 1 The process described in the text is conceptually the easiest way to understand what happens in a securitization, and it is the basis for some securitizations. More common, however, is a “swap” arrangement, whereby the GSE will swap the securities for the mortgages from the originator.
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