In a surprising turn of events, the NYFed—no less—has gone after the Bank of America for its fraudulent mortgage business. Yes, the former home to Treasury Secretary Geithner–the best friend Wall Street has ever had–is now acting like the lapdog that bites the hand that feeds.

BofA has reacted as expected, trying to slap the little pipsqueak pet back into submission, announcing an end to its moratorium on foreclosure fraud and threatening to unleash its dark army of lawyers who are ready to do battle in the courts to maintain the myth that the junk banks securitized met required underwriting standards.

It is of course all high drama worthy of a mid-afternoon soap opera, with the Fed proclaiming dismay, nay, shock!, that banks sold it toxic waste. The over-acting would be hilarious if this were not such a serious issue.

In truth, it is all fraud, from start to end—from origination of the mortgages through the securitization, on to the duping of investors, and to the foreclosing on (mostly) innocent bystanding homeowners. The FBI warned of an epidemic of mortgage fraud in 2004, investigations demonstrate that 80% of the fraud is at the hands of lenders, and the fraud was no secret within the industry and within government long before the NYFed, USFed, and Treasury started bailing out the control fraud banks by purchasing their assets, guaranteeing their liabilities, lending against toxic waste, and buying their worthless equities—putting Uncle Sam on the hook in an amount estimated to total more than $20 trillion.

Meanwhile, the bank frauds have been kicking Americans out of their homes, manufacturing fake documents, and re-selling property to which they have no legitimate title.

But the past week has not been good for control fraud banks. State Attorneys General have gone after them, thumbing their collective noses at the weak-kneed Obama Administration that had done nothing more than to plead with the frauds to please be a tad bit nicer as they steal homes.

Judges have also gone after banks—noticing how amateurish the doctored and counterfeited documents looked, and they began to throw the bank plaintiffs out of court. We know that in many or most cases the banks do not have the borrowers’ notes—that are required in almost all states to take away someone’s home. Lots of bank officials and employees have committed crimes for which they can be prosecuted and for which they will serve real prison time.

All of this seems to have forced the Fed’s hand. Most bettors had put their money on Fannie and Freddie, not the Fed, to first call the bluff of the bank frauds. They have far more on the line—no doubt they are sitting on well over a trillion dollars worth of junk that does not meet the underwriting standards claimed by the securitizers. To be sure, they had taken some action, but it was the NYFed’s audacity that grabbed the headlines. Hey, there is, finally, the audacity of hope that President Obama used to talk about—funny that it should rest in the hands of the thoroughly compromised NYFed.

The banks, predictably, claim everything is fine. BofA supposedly spent a couple of hours during its self-imposed introspective moratorium to check through hundreds of thousands of foreclosures to ensure that all its procedures were appropriate. Surprise, surprise, it could not find a single mistake! Boy, these guys ARE good, even though they took over the mother of all control frauds, Countrywide Financial—inheriting its toxic waste. Yet, not one error! There is, again, a certain audacity there—perhaps one more in tune with the protect-Wall-Street-at-any-cost sort of song Karaoked so far at the White House.

Right—please sell me a Brooklyn bridge, or two, too. The fraud continues apace. The banks intend to continue to defraud both homeowners and investors in the toxic securities it sold.

How do we know it is all fraud?

Look, when lenders market “low doc”, “Ninja” and “Liar’s loans” (that accounted for half of all mortgages at the peak of the bubble), there is no question that the intent is to defraud investors. The appellations say it all. When lenders market “nuclear” hybrid loans with low teaser rates that blow up in two or three years, forcing borrowers into default, there is no question that the intent is to defraud borrowers. Fraud was the business model. Everyone in the industry knew that—from property appraisers to originators to credit raters to securitizers to insurers. Fraud, fraud, fraud. It is time to break out that F word and to use it liberally.

In an important piece by Felix Salmon (blogs.reuters.com/felix-salmon/2010/10/13/the-enormous-mortgage-bond-scandal/), a “smoking gun” is produced. The big investment banks (Goldman, Bear, Citigroup, Merrill, Lehman, Morgan, Deutsche) used Clayton Holdings to do “third-party due diligence” on the mortgages that were pooled into securities. Note that this was most certainly NOT done to protect the investors who would buy the securities—rather it was to SCREW them. Clayton would “taste sample” some of the mortgages (5% to 35%), typically finding that a third or more did not meet underwriting standards. The investment bank would then kick those out and go back to the originator to renegotiate the price on the entire mortgage pool. Since the investment bank had proof that the pool did not meet standards, it would be able to get a better price.

Here’s the kicker. The investment bank did not, and did not want to, examine the whole pool in order to reject all the bad loans. Indeed, it WANTED a bad pool–a package of mortgages that contained many mortgages that did not meet underwriting standards–because this allowed it to reduce the price paid. Then it would tell the investment buyers of the securities “Oh, yes, we did due diligence, using an expert third party”. Of course the investment bank would not pass along the price discount it had obtained from the originator, and would not tell the buyer that the pool still contained an untold amount of junk mortgages. That would defeat the whole purpose of the third party “due diligence”—which was done only for the benefit of the investment bank in order to screw more profits out of the investor. Amazingly, the banks turned “due diligence” into a mechanism for fraud. These guys ARE audacious. They ARE good!

So here we are. The Fed, Fannie and Freddie, Pimco, and other big holders of the securities are now going after the banks. This is going to get really fun.

There is no better time to declare a bank holiday to try to unravel this mess. The banks will not survive the onslaught. The only question is how long do we really want to drag this out? Should we go through years of court battles while the economy suffers and Americans lose their homes? Or do we just get it over this weekend by shutting down the control frauds? Void all the fraudulent paper, let occupants keep their homes and negotiate fair “rents” in lieu of unaffordable mortgages. Swiftly deal with the fall-out. Pursue, prosecute, and incarcerate the guilty. Return the nation to the rule of law.

By L. Randall Wray

There was a strange debate about financial regulation in connection with various annual meetings of the international finance bodies in Washington, D.C. this weekend. The nominal debate was between the supposed hawks and doves on regulatory capital requirements. The most vocal doves spoke at the Institute of International Financial (IIF) meeting. Joseph Ackermann, Deutsche Bank’s CEO, is the IIF chairman. Germany, of course, at the behest of its banks, led the opposition within the Basel III process to raising capital requirements. Germany prevailed in the Basel III process, leading to a lengthy delay (until 2019) in returning nominal capital requirements to pre-Basel II levels.

(Basel II reduced capital requirements in Europe to farcical levels. Even those levels were fictional because most large banks massively overvalued their mortgage assets.)

Ackermann decried proposals to require systemically dangerous institutions (SDIs) to hold additional capital and proposals to speed up Basel III’s proposed increases in nominal capital levels. He argued that Lehman’s failure proved that interconnectedness, not simply size, contributed to causing global systemic risk. That is true, but his argument strongly supports requiring the SDIs to shrink to a level at which they would no longer pose systemic risks.

IIF released an interim study in June 2010 claiming that Basel III’s higher capital requirements would reduce signatory nations’ GDP by three percent. These studies are easy to create. If one assumes (1) that banks will be (really) profitable (as opposed to creating fictional accounting income and real losses) and (2) that the banks’ incentives and real successes will be unaffected by even exceptional leverage, then it follows that the greater the leverage the greater the bank lending and profitability. If one then assumes that greater bank loans will fund productive investments, thereby causing greater real growth (as opposed to inflating asset bubbles, which reduce real growth) and that this relationship is continuous (e.g., the more commercial real estate we finance in Atlanta the faster Atlanta’s economy will grow — forever), then extraordinary bank leverage must expand GDP. The optimal bank capital requirement is no requirement. None of these assumptions, conclusions, or predictions is valid, and we have just seen that the opposite can be true, but theoclassical economists’ dogmas have proven impervious to reality.

The capital hawks promptly responded to Ackermann. Kansas City Federal Reserve Bank President Thomas Hoenig argued that higher bank capital requirements were necessary for sustained economic growth. Hoenig’s remarks took aim at the central premise of self-regulation by markets – the concept of “private market discipline.”

“It [the markets] didn’t, it can’t and it won’t, [self-regulate]. The industry’s structure and incentives are now inconsistent with the market being the disciplinarian.”

The problem with this debate is that it has little to do with reality. The banking industry, in alliance with the U.S. Chamber of Commerce, with Bernanke’s blessings (and with no opposition from the Obama administration), succeeded in using Congress to extort FASB to change the accounting rules so that banks do not have to recognize their real estate losses until they sell their bad assets. This makes the entire debate about nominal capital requirement surreal. Capital requirements are accounting concepts. If you pervert the accounting rules you render the capital requirements meaningless. This was done deliberately to subvert the Prompt Corrective Action law and to allow the continued payment of bonuses to bank senior officers. There is no meaningful capital requirement for the SDIs with enormous holdings of toxic mortgage assets.

The Fed’s “stress tests” deliberately ignored the losses on these assets. There are no real hawks at the Fed on capital requirements. Not a single senior Fed supervisor has the spine to even find the truth, much less close an insolvent SDI. Bernanke’s claim that they would have placed the huge, insolvent investment banks in receivership in 2008 if the Fed had possessed such resolution authority is preposterous. The banking regulators had ample authority to place insolvent federally insured banks that were SDIs in receivership but lacked the courage and integrity to do so.

The housing market stalled in mid-2006 and the uninsured mortgage bankers began failing in late 2006. The secondary market in nonprime mortgages collapsed in spring 2007. Years later, we have covered up the causes and extent of the crisis. This must end. GMAC’s, Fannie’s, and Freddie’s managers, the Federal Housing Finance Agency (FHFA), and the GAO should conduct three studies using data available at those enterprises and the Fed.

First, what is best estimate of the market value losses on liar’s loans, subprime loans, and CDOs held by Fannie, Freddie, and as collateral by the Fed? To what extent have those losses been recognized by the entities holding the assets? To what extent are Fannie, Freddie, and the Fed under collateralized? The Fed should demand additional collateral to ensure that it is not exposed to any loan losses.

Second, examine a sample of those assets’ loan and servicing files to determine the incidence of likely fraud that can be spotted simply through file reviews. This second study should determine the lender on each fraudulent loan and the professionals involved (e.g., the investment bankers that created the CDOs, the appraiser, the outside auditor, and the rating agency). This list should be used to prioritize administrative, civil, and criminal investigations. The list of likely fraudulent loans should be cross checked against list of criminal and SEC referrals to determine which entities are failing to make referrals. The GAO should formally alert the relevant regulatory agencies about which entities are not making adequate referrals. The entities conducting the study should make criminal and SEC referrals where others have failed to do so. Fannie and Freddie should be directed by FHFA to put back fraudulent mortgages to the lenders/CDO packagers.

Third, review the loan and servicing files of a sample of GMAC’s mortgage servicing portfolio and its foreclosures during the first half of 2010. Determine the extent of likely mortgage fraud for the mortgages serviced by GMAC (and follow the steps recommended above). Determine the extent of GMAC files that lack adequate documentation to ensure the ability to conduct a valid foreclosure. Review a sample of the loan and servicing files for mortgage instruments that the Fed has taken as collateral. Determine the extent to which the file deficiencies would pose difficulties for the Fed if it sought to foreclose on mortgage assets it holds as collateral. Review a sample of GMAC foreclosures to determine the extent to which such foreclosures were invalid, unethical, or unlawful because of defects in the files or foreclosure processes used by GMAC or its agents. If the sample reveals material problems direct GMAC to cure any defects or abuses.

The fact that four years after the onset of greatest financial crisis of our lives neither the industry nor the regulators have systematically studied these basic facts essential to addressing this crisis and avoiding future crises is a demonstration of how destructive the cover up has been. We should not be forced to spell out and mandate the studies that any competent, honest decision maker would have begun nearly four years ago. The fact that Treasury Secretary Geithner, a co-architect of the cover up (with Paulson and Bernanke), is engaged in a successful propaganda campaign premised on the facially absurd claim that the entire banking crisis was resolved at a taxpayer cost of roughly $50 billion is a testament to the continued debasement of not only the Department of the Treasury, but also too much of the financial press.

Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.

Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog New Economic Perspectives.

The scope of foreclosure fraud may not be limited to GMAC and not just to JPMorgan Chase; it may be every bank you can think of, including mortgages held by government-sponsored enterprises Fannie Mae and Freddie Mac. Any bank whose foreclosures have been handled by a law firm specializing in foreclosure services — a “foreclosure mill” — may be affected.

A paralegal at the foreclosure mill of David Stern gave a deposition to Florida’s Attorney General Bill McCollum’s office indicating that virtually every affidavit, assignment or other sworn document coming out of that firm is faked.

It’s over 100 pages, and it will curl your hair. Two thousand foreclosure files were processed each day by just this one firm and the entire lot appears to have been a sham. Go read the transcript for yourself. If this happened at one foreclosure mill, it’s hard to believe this wasn’t happening at all the other foreclosure mills.

Ohio’s attorney general is suing for $25,000 in fines for each fraudulent affidavit; at this rate, he could solve his state’s budget gap.

By the way, Florida’s assistant attorneys general conducted a very nice line of questioning; Mr. McCollum owes them a pat on the back. The states of Ohio and Florida are showing how it’s done, the rest of you states’ attorneys general and U.S. Attorneys need to get on the stick.

By: Cynthia Kouril

For anyone who assumed that the toughened real-estate appraisal rules imposed on the mortgage market last year would mean less monkey business in home valuations, here’s a shocker: Fraudulent appraisals soared in 2009, according to a lending-industry study released this week, and they now represent the fastest-growing form of home loan fraud.

The Mortgage Asset Research Institute found that, while overall incidences of loan fraud rose last year by 7 percent, the share of frauds involving property valuations increased 50 percent. MARI, a service of data company LexisNexis, collects information from more than 600 wholesale mortgage lenders who account for the vast bulk of loans originated in the country. Once a year, MARI reports its findings on fraud trends to the Mortgage Bankers Association.

Although the biggest source of mortgage fraud last year was intentional misinformation submitted by borrowers on their applications — bogus Social Security numbers or data on income, employment and assets — distorted valuations came in second. In previous annual reports, appraisal problems were far less prominent. As recently as 2006, just 16 percent of all mortgage fraud cases involved skewed property valuations. By 2008, 22 percent of reported fraud involved bad appraisals, whereas last year, that number rose to 33 percent, according to MARI.

The surge in appraisal shenanigans came despite the nationwide imposition of restrictions last year that were designed to limit interference in real estate valuations and to improve their accuracy. As of May 1, 2009, mortgage giants Fannie Mae and Freddie Mac prohibited loan officers and brokers from selecting appraisers, and effectively encouraged lenders to use “appraisal management companies” that assign appraisers from their own networks nationwide.

The new rules, known as the , stoked immediate controversy among mortgage brokers, appraisers, home builders and real-estate brokers. Critics charged that because management companies pay rock-bottom compensation to appraisers — often as little as $175 for an assignment that previously made them $350 to $450 — the new rules encouraged the use of inexperienced people, who frequently were not familiar with local market conditions.

Critics also charged that management companies forced appraisers to turn in their work within unrealistically short deadlines, even if they had to cut corners on quality and thoroughness.

Citing widespread evidence submitted by members about lowball and incompetent appraisals, the National Association of Realtors waged a lobbying campaign to persuade Congress to put the rules imposed by Fannie and Freddie on ice for 18 months. Congress has not acted on the matter.

Bill Garber, government affairs director for the Appraisal Institute, the largest trade group representing the industry, said the surge in bad appraisals last year “demonstrates what happens when lenders hire appraisers solely based on low prices and quick turnaround times.”

“This should send a loud signal to lenders to hire ethical and competent appraisers” if they want to avoid fraud in their loans, Garber said.

Freddie Mac spokesman Brad German offered a different view. Because the MARI study made no specific reference to the rule changes by Freddie and Fannie or to the use of appraisal-management companies, “we see no connection between [the code] and appraisal fraud.” Fannie Mae officials declined to comment.

Jeff Schurman, executive director of the Title/Appraisal Vendor Management Association, which represents the appraisal management industry, had no immediate comment on the findings, pending a review of the data.

The fraud report covered every major type of valuation method lenders use to underwrite mortgages, including traditional appraisals, electronic valuations and broker price opinions supplied by real estate agents, among others.

The biggest game fraudsters play: messing with or fabricating the information on “comparables” that form the basis of most appraisal reports. Rather than selecting nearby properties with broadly similar physical characteristics and recently recorded selling prices, bad appraisers typically come up with houses and characteristics that better fit their purposes.

Sometimes, they just left out the negatives. A hypothetical example: The property they were valuing was located near a busy and noisy highway or railroad tracks that would normally depress its value significantly. No problem. Poof — the appraisal report could omit those issues.

What did fabrications like these achieve? Primarily custom-tailored property valuations that were often off-base by 15 to 30 percent or more and allowed the sales contract and loan application to be approved. This, in turn, left lenders holding the bag when the mortgage went sour, raising losses and making the national foreclosure crisis even worse.

Kenneth Harney, WSJ

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Freddie Mac’s recent choice of Ocwen Financial Corporation to participate in a pilot program aimed at streamlining high risk loan modifications is an interesting one, to say the least.

Background:

• In 2004, Ocwen Financial Corporation sought voluntary dissolution of Ocwen Federal Bank. According to Ocwen’s FORM 10-K filings for the fiscal year ended December 31, 2004, the bank filed for voluntary dissolution of OFB with the The Office of Thrift Supervision (OTS) on November 24, 2004. (The OTS acts as the primary regulator of all federal and many state-chartered thrift institutions, including savings banks and savings and loan associations.)
• A jury in Galveston, Texas, in November 2005, awarded $11.5 million to a customer of Ocwen Financial Corp and its former Ocwen Federal Bank subsidiary, after determining the two companies committed fraud in servicing the customer’s home equity loan.
• The verdict against Ocwen Federal was issued in Texas’s 212th District Court. The jury ordered the Ocwen companies to pay Sealy Davis $10 million in actual damages and about $1.5 million for mental anguish and economic damages, reported the South Florida Business Journal.
• This came after Ocwen Federal Bank signed a written agreement in April 2004 with OTS agreeing to improve its compliance with the Real Estate Settlement Procedures Act (RESPA), the Fair Debt Collection Practices Act, and the Fair Credit Reporting Act.
• Again, according to Ocwen’s FORM 10-K filings for the fiscal year ended December 31, 2004, the company reported that “if this process, which we refer to as “debanking,” is completed, we would dissolve the Bank and continue its non-depository businesses, including its mortgage servicing business, under another subsidiary of our Company, which would be licensed where necessary at the state or territory level.”

Fast forward to February 2009 and Ocwen is once again making headlines in the loan servicing industry. Freddie Mac must be satisfied that Ocwen has changed its ways because it just selected Ocwen to test a new pilot program to streamline loan modifications for distressed homeowners.

Under the new pilot, a selected portfolio of higher risk mortgages that are at least 60 days delinquent will be given to a specialty servicer–Ocwen Financial Corporation–for intensive attention using the full range of Freddie Mac workout opportunities, including the Streamlined Modification Program developed with the Federal Housing Finance Agency, Fannie Mae and the HOPE Now Alliance.

Posted on Freddie Macs site was this statement by Ocwen Chairman and CEO, William Erbey:

“We applaud Freddie Mac’s leadership in foreclosure prevention and are delighted to support this innovative initiative. We bring the technology and processes that now achieve successful workouts in the overwhelming majority of delinquent loans in our servicing portfolio. Our goal is and will continue to be to engineer workouts that keep homeowners in their homes and return greater cash flow to the loan owner than the proceeds from a foreclosure – a win/win situation for American homeowners and taxpayers alike.”

Understanding that there are only a limited number of companies large enough to handle the volume of loan modification business Freddie Mac has, it still leaves you wondering whether Freddie Mac made the best choice by picking Ocwen.

While a lot will be written about the U.S. government’s takeover of Freddie Mac and Fannie Mae, very little is likely to be said about the role real estate and mortgage fraud played in the run-up to the takeovers themselves.

With real estate fraud still labeled by the FBI as the “fastest-growing white collar crime,” and with a high percentage of mortgage loans containing overwhelming evidence of fraudulent claims, one would think that now would be the time that interviews with Treasury Secretary Henry M. Paulson Jr. would touch upon the F-word. Sadly though, it’s business as usual at all of the national media outlets covering this story. It’s as if they don’t even know to ask about real estate fraud, which of course is utterly insane:

At the very beginning of the current mortgage meltdown and resulting foreclosure epidemic, a small group of people–myself included–pointed out the true main cause of this mess–fraud. Most people I talked with either didn’t understand or disagreed, including a lot real estate professionals and–not surprising–members the national media. Most still think today’s mess had more to do with irresponsible lending on the part of consumers, the popularity of poorly conceived mortgage loan products, and a long overdue market correction in property values.

The truth then as it is now, is that fraud is at the very root of the problems we’re experiencing.

Unfortunately, getting the national media or the real estate and mortgage industry to admit to this fact is nearly impossible. For the national media, it appears to be too easy for them to just tell the story as it is being fed to them by the government (in other words, they’re either lazy or don’t have the resources to dig just a little deeper). And for the real estate and mortgage industry, well, they just have too much to lose by admitting the truth. If fraud is a proven contributing factor to a borrower’s defaulting on a loan, the mortgage lender is required to buy the bad loan back from Fannie Mae, Freddie Mac, or the Wall Street Firms who sold the loan to investors.

Fraud has been and continues to be so rampant that acknowledging its role in this mess would lead to the mortgage banks having to buy back billions of dollars in bad loans, which they simply cannot afford to do.

The current state of denial about fraud is only making the problem worse. Until the Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac), and the real estate and mortgage loan industry all wake up and admit to the problem, the fraudsters will be free to continue in their ways with no thought of the future mess they’re causing.

Senior White House officials, along with top brass from the Federal Reserve, met earlier this evening with executives from Freddie Mac and Fannie Mae and reportedly told them that the U.S. government is preparing to place the two government sponsored enterprises (GSEs) under federal control. The plan, as outlined by The New York Times, would place both companies into a conservatorship, which means that their boards of directors and top executives would be replaced and shareholders would almost entirely be wiped out, but that the GSEs would continue operations with the federal government standing behind their debt.

Fannie Mae and Freddie Mac are privately owned but publicly chartered, and are considered critical to the stability of the U.S. housing and mortgage markets. Their current troubles have threatened to worsen the bursting of the housing bubble, which along with significant levels of fraud, has led to a surge in foreclosures.

The U.S. Treasury Department and the Federal Reserve recently took steps to increase confidence in both organizations, including granting them access to low-interest loans and removing the prohibition on the Treasury to purchase the GSEs’ stock. Despite these efforts, in the last year alone, publicly held shares of Fannie Mae and Freddie Mac have fallen more than 75%.

Just last week, Fannie Mae announced that the company’s chief financial officer, Stephen Swad, was being replaced by David C. Hisey, and that former Executive Vice President of Capital Markets, Peter Niculescu, would take on an expanded role as the new Chief Business Officer to replace Robert J. Levin, who is retiring as Executive Vice President and Chief Business Officer. The company also announced Michael Shaw would be appointed as the new chief risk officer and Daniel Mudd, the company’s embattled president and chief executive officer, would remain in place after a vote of confidence from the Board of Directors.

Tonight’s news of a government takeover comes just hours after the Mortgage Bankers Association released its latest National Delinquency Survey, which shows that the rate of U.S. home mortgages overdue or in foreclosure rose again in the second quarter. Among mortgages for one- to four-family homes, nearly 10% are currently at least one month overdue or in foreclosure.

From The New York Times:

Just five weeks ago, President Bush signed a law to give the administration the authority to inject billions of dollars into the companies through investments or loans. In proposing the legislation, Treasury Secretary Henry M. Paulson Jr. said that he had no plan to provide loans or investments, and that merely giving the government the authority to backstop the companies would provide a strong shot of confidence to the markets. But the thin capital reserves that have kept the two companies afloat have continued to erode as the housing market has steadily declined and the number of foreclosures has soared.

As their problems have deepened — and the marketplace has come to expect some sort of government rescue — both companies have found it difficult to raise new capital to absorb future losses. In recent weeks, Mr. Paulson has been reaching out to foreign governments that hold billions of dollars of Fannie and Freddie securities to reassure them that the United States stands behind the companies.

Less than 48 hours after federal regulators seized IndyMac Bank, the Board of Governors of the United States’ Federal Reserve System announced today that it has granted the Federal Reserve Bank of New York the authority to lend to Fannie Mae and Freddie Mac should such lending prove necessary.

Any lending would be at the primary credit rate and collateralized by U.S. government and federal agency securities. This authorization is, according to the Fed, intended to supplement the Treasury Department’s existing lending authority and to help ensure the ability of Fannie Mae and Freddie Mac to promote the availability of home mortgage credit during a period of stress in financial markets.

For the uninitiated, Freddie Mac is a stockholder-owned corporation established by the United States Congress in 1970 to provide liquidity, stability and affordability to the nation’s residential mortgage markets. Freddie Mac raises capital on Wall Street and throughout the world’s capital markets to finance mortgages for homeowners across U.S. Over the years, it has been estimated that Freddie Mac has made homeownership possible for one in six homebuyers.

For his part, Freddie Mac chairman and CEO Richard Syron, had this to say about today’s development:

We are heartened by today’s announcement and the steps outlined by the U.S. Department of the Treasury and the Federal Reserve Board. This affirmation of the important role of the GSEs, and that we should continue to operate as shareholder-owned companies, should go a long way toward reassuring world markets that Freddie Mac and Fannie Mae will continue to support America’s homebuyers and renters. I applaud Secretary Paulson and Chairman Bernanke for their leadership and encourage Congress to act quickly to pass the new legislative proposals.

Freddie Mac and the Office of Federal Housing Enterprise Oversight (OFHEO) say the company is adequately capitalized, has a large liquidity portfolio and access to the world’s debt markets. The company is in the process of finalizing its June 30, 2008 financial results and says they will show that Freddie Mac has a substantial capital cushion above the 20% mandatory target surplus established by federal regulations.

Speaking on behalf of the United States government, the Secretary of the U.S. Department of the Treasury, Henry Paulson, said:

Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies. Their support for the housing market is particularly important as we work through the current housing correction.

Below, when Paulson refers to “GSEs” he’s talking about government sponsored enterprises, which are a group of financial services corporations created by the United States Congress. Their function is to enhance the flow of credit to targeted sectors of the economy and to make those segments of the capital market more efficient and transparent.

GSE debt is held by financial institutions around the world. Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets. Therefore we must take steps to address the current situation as we move to a stronger regulatory structure.

In recent days, I have consulted with the Federal Reserve, OFHEO, the SEC, Congressional leaders of both parties and with the two companies to develop a three-part plan for immediate action. The President has asked me to work with Congress to act on this plan immediately.

First, as a liquidity backstop, the plan includes a temporary increase in the line of credit the GSEs have with Treasury. Treasury would determine the terms and conditions for accessing the line of credit and the amount to be drawn.

Second, to ensure the GSEs have access to sufficient capital to continue to serve their mission, the plan includes temporary authority for Treasury to purchase equity in either of the two GSEs if needed.

Use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer.

Third, to protect the financial system from systemic risk going forward, the plan strengthens the GSE regulatory reform legislation currently moving through Congress by giving the Federal Reserve a consultative role in the new GSE regulator’s process for setting capital requirements and other prudential standards.

I look forward to working closely with the Congressional leaders to enact this legislation as soon as possible, as one complete package.