FEDERAL HOUSING FINANCE AGENCY …

            FEDERAL HOUSING FINANCE AGENCY




                                  STATEMENT

                                            Contact:   Corinne Russell   (202) 414-6921
                                                       Stefanie Mullin   (202) 414-6376

For Immediate Release
September 7, 2008

                   ****EMBARGOED UNTIL 11 a.m. ****

   STATEMENT OF FHFA DIRECTOR JAMES B. LOCKHART

Good Morning

Fannie Mae and Freddie Mac share the critical mission of providing stability and

liquidity to the housing market. Between them, the Enterprises have $5.4 trillion

of guaranteed mortgage-backed securities (MBS) and debt outstanding, which is

equal to the publicly held debt of the United States. Their market share of all new

mortgages reached over 80 percent earlier this year, but it is now falling. During

the turmoil last year, they played a very important role in providing liquidity to the

conforming mortgage market.        That has required a very careful and delicate

balance of mission and safety and soundness. A key component of this balance has

been their ability to raise and maintain capital. Given recent market conditions, the

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balance has been lost. Unfortunately, as house prices, earnings and capital have

continued to deteriorate, their ability to fulfill their mission has deteriorated. In

particular, the capacity of their capital to absorb further losses while supporting

new business activity is in doubt.



Today's action addresses safety and soundness concerns. FHFA's rating system is

called GSE Enterprise Risk or G-Seer.        It stands for Governance, Solvency,

Earnings and Enterprise Risk which includes credit, market and operational risk.

There are pervasive weaknesses across the board, which have been getting worse

in this market.



Over the last three years OFHEO, and now FHFA, have worked hard to encourage

the Enterprises to rectify their accounting, systems, controls and risk management

issues. They have made good progress in many areas, but market conditions have

overwhelmed that progress.



The result has been that they have been unable to provide needed stability to the

market.   They also find themselves unable to meet their affordable housing

mission. Rather than letting these conditions fester and worsen and put our markets

in jeopardy, FHFA, after painstaking review, has decided to take action now.



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Key events over the past six months have demonstrated the increasing challenge

faced by the companies in striving to balance mission and safety and soundness,

and the ultimate disruption of that balance that led to today's announcements. In

the first few months of this year, the secondary market showed significant

deterioration, with buyers demanding much higher prices for mortgage backed

securities.



In February, in recognition of the remediation progress in financial reporting, we

removed the portfolio caps on each company, but they did not have the capital to

use that flexibility.



In March, we announced with the Enterprises an initiative to increase mortgage

market liquidity and market confidence. We reduced the OFHEO-directed capital

requirements in return for their commitments to raise significant capital and to

maintain overall capital levels well in excess of requirements.



In April, we released our Annual Report to Congress, identifying each company as

a significant supervisory concern and noting, in particular, the deteriorating

mortgage credit environment and the risks it posed to the companies.



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In May OFHEO lifted its 2006 Consent Order with Fannie Mae after the company

completed the terms of that order. Subsequently, Fannie Mae successfully raised

$7.4 billion of new capital, but Freddie Mac never completed the capital raise

promised in March.



Since then credit conditions in the mortgage market continued to deteriorate, with

home prices continuing to decline and mortgage delinquency rates reaching

alarming levels. FHFA intensified its reviews of each company's capital planning

and capital position, their earnings forecasts and the effect of falling house prices

and increasing delinquencies on the credit quality of their mortgage book.



In getting to today, the supervision team has spent countless hours reviewing with

each company various forecasts, stress tests, and projections, and has evaluated the

performance of their internal models in these analyses.        We have had many

meetings with each company's management teams, and have had frank exchanges

regarding loss projections, asset valuations, and capital adequacy. More recently,

we have gone the extra step of inviting the Federal Reserve and the OCC to have

some of their senior mortgage credit experts join our team in these assessments.




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The conclusions we reach today, while our own, have had the added benefit of

their insight and perspective.



After this exhaustive review, I have determined that the companies cannot continue

to operate safely and soundly and fulfill their critical public mission, without

significant action to address our concerns, which are:



   · the safety and soundness            issues I mentioned, including current

      capitalization;

   · current market conditions;

   · the financial performance and condition of each company;

   · the inability of the companies to fund themselves according to normal

      practices and prices; and

   · the critical importance each company has in supporting the residential

      mortgage market in this country,




Therefore, in order to restore the balance between safety and soundness and

mission, FHFA has placed Fannie Mae and Freddie Mac into conservatorship.

That is a statutory process designed to stabilize a troubled institution with the


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objective of returning the entities to normal business operations. FHFA will act as

the conservator to operate the Enterprises until they are stabilized.



The Boards of both companies consented yesterday to the conservatorship. I

appreciate the cooperation we have received from the boards and the management

of both Enterprises. These individuals did not create the inherent conflict and

flawed business model embedded in the Enterprises' structure.



The goal of these actions is to help restore confidence in Fannie Mae and Freddie

Mac, enhance their capacity to fulfill their mission, and mitigate the systemic risk

that has contributed directly to the instability in the current market. The lack of

confidence has resulted in continuing spread widening of their MBS, which means

that virtually none of the large drop in interest rates over the past year has been

passed on to the mortgage markets. On top of that, Freddie Mac and Fannie Mae,

in order to try to build capital, have continued to raise prices and tighten credit

standards.



FHFA has not undertaken this action lightly.          We have consulted with the

Chairman of the Board of Governors of the Federal Reserve System, Ben

Bernanke, who was appointed a consultant to FHFA under the new legislation. We



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have also consulted with the Secretary of the Treasury, not only as an FHFA

Oversight Board member, but also in his duties under the law to provide financing

to the GSEs. They both concurred with me that conservatorship needed to be

undertaken now.



There are several key components of this conservatorship:



First, Monday morning the businesses will open as normal, only with stronger

backing for the holders of MBS, senior debt and subordinated debt.



Second, the Enterprises will be allowed to grow their guarantee MBS books

without limits and continue to purchase replacement securities for their portfolios,

about $20 billion per month without capital constraints.



Third, as the conservator, FHFA will assume the power of the Board and

management.



Fourth, the present CEOs will be leaving, but we have asked them to stay on to

help with the transition.




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Fifth, I am announcing today I have selected Herb Allison to be the new CEO of

Fannie Mae and David Moffett the CEO of Freddie Mac. Herb has been the Vice

Chairman of Merrill Lynch and for the last eight years chairman of TIAA-CREF.

David was the Vice Chairman and CFO of US Bancorp.               I appreciate the

willingness of these two men to take on these tough jobs during these challenging

times. Their compensation will be significantly lower than the outgoing CEOs.

They will be joined by equally strong non-executive chairmen.



Sixth, at this time any other management action will be very limited. In fact, the

new CEOs have agreed with me that it is very important to work with the current

management teams and employees to encourage them to stay and to continue to

make important improvements to the Enterprises.



Seventh, in order to conserve over $2 billion in capital every year, the common

stock and preferred stock dividends will be eliminated, but the common and all

preferred stocks will continue to remain outstanding. Subordinated debt interest

and principal payments will continue to be made.



Eighth, all political activities -- including all lobbying -- will be halted

immediately. We will review the charitable activities.



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Lastly and very importantly, there will be the financing and investing relationship

with the U.S. Treasury, which Secretary Paulson will be discussing. We believe

that these facilities will provide the critically needed support to Freddie Mac and

Fannie Mae and importantly the liquidity of the mortgage market.



One of the three facilities he will be mentioning is a secured liquidity facility

which will be not only for Fannie Mae and Freddie Mac, but also for the 12

Federal Home Loan Banks that FHFA also regulates. The Federal Home Loan

Banks have performed remarkably well over the last year as they have a different

business model than Fannie Mae and Freddie Mac and a different capital structure

that grows as their lending activity grows. They are joint and severally liable for

the Bank System's debt obligations and all but one of the 12 are profitable.

Therefore, it is very unlikely that they will use the facility.



During the conservatorship period, FHFA will continue to work expeditiously on

the many regulations needed to implement the new law.             Some of the key

regulations will be minimum capital standards, prudential safety and soundness

standards and portfolio limits. It is critical to complete these regulations so that

any new investor will understand the investment proposition.



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This decision was a tough one for the FHFA team as they have worked so hard to

help the Enterprises remain strong suppliers of support to the secondary mortgage

markets. Unfortunately, the antiquated capital requirements and the turmoil in

housing markets over-whelmed all the good and hard work put in by the FHFA

teams and the Enterprises' managers and employees. Conservatorship will give

the Enterprises the time to restore the balances between safety and soundness and

provide affordable housing and stability and liquidity to the mortgage markets. I

want to thank the FHFA employees for their work during this intense regulatory

process. They represent the best in public service. I would also like to thank the

employees of Fannie Mae and Freddie Mac for all their hard work. Working

together we can finish the job of restoring confidence in the Enterprises and with

the new legislation build a stronger and safer future for the mortgage markets,

homeowners and renters in America.



Thank you and I will now turn it back to Secretary Paulson.




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