GSEs Adjust Payments For New Fed Credit Policy
(Less liquidity? - how dry do we make the swamp Russ? the mosquitoes still bugging me)
By Campion Walsh
Of DOW JONES NEWSWIRES
WASHINGTON (Dow Jones)--Government-sponsored enterprises in the home mortgage market said Wednesday they are adopting new methods of paying principal and interest on their debt ahead of a change this month in Federal Reserve policy on intraday credit.
Fannie Mae (FNM), Freddie Mac (FRE) and the Federal Home Loan Banks all said they expect to fully fund their daily payment obligations, while suggesting different ways of adjusting to the Fed's long-anticipated move to stop providing free intraday credit beginning July 20.
Fannie Mae said it has developed "various funding vehicles with market participants and has a variety of tools at its disposal to fund payment obligations during the day, including debt issuance, lender collections and investment maturities."
"Fannie Mae intends to begin funding security holder payments in 20% increments as early as possible each morning and is confident it will fully fund payment obligations no later than 4:00 p.m. (eastern time) daily," the company said in a press release.
For its part, Freddie Mac said it "has been actively preparing for the changes during the past two years and has responded by implementing a strategy that aims to fully fund the company's daily payment obligations by 11 a.m. eastern time."
In its statement, Freddie Mac added it believes the Fed's move to stop giving free intraday credit to GSEs "will not have a material adverse effect" on the company's liquidity. The home mortgage GSE said it began testing its new procedure in April and is now operating under the revised Fed policy.
The Federal Home Loan Banks' Office of Finance said it would typically spread payments from early in the morning until early- or mid-afternoon. The FHLBs "plan to use a variety of sources for funding interest and principal payments, including the proceeds from the settlement of new securities," the finance office said in a prepared statement.
The FHLBs plan to keep their current timing for settlement of newly issued bonds and discount notes, while setting up "a contingency arrangement to support the timely payment of these obligations."
The FHLBs expect to divide payments on discount notes into increments while maintaining undivided payments on bonds.
"Partial pro rata payments on discount notes may begin early in the morning and will typically extend into the early- to mid-afternoon," according to the FHLB statement. Principal and interest payments are expected to be made "in a timely manner, generally well in advance of the 4:00 p.m. cut-off time," it said.
Free daylight credit from the Fed has let GSEs and some other privileged debt issuers pay principal and interest due on outstanding securities as the business day begins, even if funds to cover those payments trickle into the issuers' Fed accounts as late as 6:30 p.m. eastern time that day.
Under a policy change approved in September 2004, the Fed will stop giving free intraday credit to Freddie Mac, Fannie Mae and the FHLB, as well as federal farm credit banks, the World Bank and the International Monetary Fund.
Under the new policy, debt payments that aren't funded by 4:00 p.m. eastern time won't be processed until the following day.
The Fed has said it is ending free credit to the GSEs and other debt issuers to improve the central bank's risk management, while putting these issuers on a more level playing field with private-sector borrowers.
While Freddie Mac said Wednesday it doesn't anticipate material damage to its own liquidity, observers have said the Fed policy change will lead to less liquidity in the overall payment system and increased costs for daylight overdraft.
By ensuring investors in GSE debt receive their payments early in the day, the Fed's free credit offer has indirectly added liquidity to the broader payment system.
"What remains unclear is how the rest of the payment system will adapt to the loss of intraday credit that was created as a byproduct of the GSEs' operations," said a recent analysis by financial markets research firm Wrightson ICAP.
The Fed has worked with the GSEs, banks and other market players on operational tweaks to smooth the transition, while fostering discussion about alternative intraday credit.
Considerable amounts of money are involved. GSE payments through the Fed generally range from about $30 billion on an average day to more than $80 billion on the two days a month when Fannie Mae and Freddie Mac pay principal and interest. During heavy mortgage-payment periods, the daily amounts can peak at more than $100 billion.
The Fed has coordinated an industry working-group meeting since last year to prepare for the changes. At the group's behest, the Fed is allowing partial payment of principal and interest throughout the day, potentially reducing funds tied up in accounts at the Fed.
-By Campion Walsh, Dow Jones Newswires; 202 862 9249; campion.walsh@dowjones.com
(END) Dow Jones Newswires
July 13, 2006 07:30 ET (11:30 GMT) |
