U.S. Bails Out Fannie Mae, Freddie Mac

8 09 2008

Officials with the Treasury Department, the Federal Reserve and the Federal Housing Finance Agency seized control of embattled mortgage giants Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE:FRE) on Sept. 7, in hopes of stabilizing the housing and financial markets.

Washington, D.C.-based Fannie Mae and McLean, Va.-based Freddie Mac purchase or guarantee most of the home mortgages in the U.S. A crisis of investor confidence in the companies sent their stocks spiraling downward earlier this summer.

Congress passed legislation in July granting the government the authority to bail out the government sponsored enterprises (GSEs), and Sunday it exercised that authority.

“We have closely monitored financial market and business conditions and have analyzed in great detail the current financial condition of the GSEs – including the ability of the GSEs to weather a variety of market conditions going forward,” said Treasury Secretary Henry Paulson “As a result of this work, we have determined that it is necessary to take action.”

That action includes ousting the chief executive officers, Fannie’s Daniel Mudd and Freddie’s Richard Syron, and placing the companies under conservatorship — which is similar to Chapter 11 bankruptcy reorganization.

Herbert Allison, former CEO of TIAA-CREF, has been named new CEO of Fannie. David Moffett, former vice chairman and chief financial officer at U.S. Bancorp will take Freddie’s helm.

Mudd and Syron have agreed to stay on during the transition in leadership

The government pledged to inject taxpayer dollars into the companies to prevent insolvency — up to $100 billion total for each company. It also will also start buying mortgage-backed securities from the companies.

Under the conservatorship agreement, shareholders equity will not be eliminated, though common shareholders will be last in terms of claims on the GSEs’ assets.

Preferred shareholders will be placed second, after common shareholders, in absorbing losses.


• The government takeover of Fannie Mae and Freddie Mac makes the mortgage market more stable long-term.

• Mortgage experts say rates should drop some over the short term.

• Qualifying for a mortgage won’t necessarily get easier, but it might if the feds tinker with fees or internal rules.


The takeover will be good news for those looking to buy a home or hoping to refinance their mortgages if it leads to lower interest rates.

But for homeowners already behind on their mortgage payments, or who owe more than their homes are now worth, the plan offers little in the way of extra relief.

Fannie Mae and Freddie Mac play a critical and increasingly dominant role in the mortgage market. The companies buy mortgage loans from banks and package those loans into securities that they either hold or sell to U.S. and foreign investors. That allows traditional lenders like Bank of America, Wells Fargo and Washington Mutual to make more loans.

Together, Fannie and Freddie own or guarantee about $5 trillion in home loans, about half the nation’s total. But an alarming number of those loans started going into default, draining the companies’ financial reserves and sending a chill through credit markets worldwide. As investors grew more skittish, borrowing costs started rising.

By placing Fannie and Freddie into a conservatorship, the government is promising investors that the companies’ debt is as safe as the Treasury Department’s.

While not a cure-all, the bailout is still a step in the right direction, industry observers say. If mortgage rates fall, that will attract more potential buyers into the market, which, in turn, will help to prop up home prices.

Government officials declined to speculate on how much mortgage rates would be affected, but said they hoped government control would allow the companies to focus on their mission of supporting the housing market.

The Federal Housing Finance Agency, the new agency created by Congress this summer to regulate Fannie and Freddie, is planning to work with the companies on existing loan modification efforts and report on their results in the coming months.

Most mortgage brokers expect Fannie and Freddie’s lending standards to remain unchanged under the conservatorship. Over the past several months, the companies have tightened requirements substantially, making it hard for borrowers with any blemish on their credit reports to qualify for a loan.

However, brokers hope the government will eliminate or reduce fees that the pair have been charging lenders to gird against increased credit risk and losses from mortgages they buy. Those rising fees are squeezing out some borrowers because lenders typically pass them along through higher mortgage rates or higher upfront costs.

Getting more buyers into the market is key to a turnaround. And a stabilized housing market with some price gains would help homeowners struggling with their mortgage payments.

Other legislation might have to fill in the holes. Lawmakers are expected to watch intently the coming months how the takeover works, but more housing legislation appears unlikely until next year. Still, lawmakers may seek to influence how Fannie and Freddie operate now that the companies are under government control.

Source: Florida Realtor Association

%d bloggers like this: