On September 7, the U.S. Treasury Department and the Federal Housing Finance Authority (FHFA) placed Fannie Mae and Freddie Mac into conservatorship, and announced (i) Treasury’s entry into a Senior Preferred Stock Purchase Agreement with each Government Sponsored Entity (GSE), (ii) the creation of a Government Sponsored Entity Credit Facility (GSECF), and (iii) the adoption of a GSE Mortgage Backed Securities (MBS) Purchase Program.

The senior preferred stock purchase agreements are indefinite contracts between the Treasury Department and both FannieMae and Freddie Mac, and ensure that both companies maintain a positive net worth by allowing the Treasury to contribute up to $100 billion to either company if the FHFA determines that the company’s liabilities exceed its assets. In exchange for entering into the agreements the Treasury (i) will receive immediate compensation in the form of $1 billion of senior preferred stock in each company that will accrue dividends at a minimum of 10% per year, and warrants to purchase common stock at a nominal price, (ii) will begin receiving in 2010 a periodic compensation fee that may be paid in cash or stock, and (iii) will receive broad approval power over all major decisions made by either company.

The GSECF, which was authorized by the Housing and Economic Recovery Act of 2008, is a lending facility that will ensure credit availability to the companies, providing secured funding on an as-needed basis under terms and conditions established by the Treasury to protect taxpayers. Funding will be provided directly by the Treasury in exchange for eligible collateral from the companies, which is limited to guaranteed MBS issued by the GSEs and Federal Home Loan Bank advances.

Finally, the Treasury will purchase MBS issued by the GSEs on the open market to promote the stability of the mortgage market and broaden access to mortgage funding for current and prospective homeowners. The scale of the program will be based on developments in the capital and housing markets, and the Treasury will designate independent asset managers as financial agents to undertake the purchase and management of MBS portfolios.