The federal government yesterday took control of mortgage giants Freddie Mac and Fannie Mae in a dramatic attempt to shore up the nation’s weakened housing market.
“Through the four actions we have taken today, [the Federal Housing Finance Agency] and Treasury have acted on the responsibilities we have to protect the stability of the financial markets, including the mortgage market, and to protect the taxpayer to the maximum extent possible,” Treasury Secretary Henry M. Paulson said Sunday. Over the next 30 days, the Treasury Department will be purchasing nearly $5 billion in mortgage bonds. Many expect that this will cause interest rates to decrease. Additionally, dividends on both common and preferred shares will be eliminated in an effort to conserve $2 billion. The Treasury Department will also buy preferred stock in Fannie and Freddie to provide security to debt holders and bolster housing finance.
Paulson said that he could not in good conscience provide an equity subsidy to the banks in their current form at the expense of taxpayers. The conservatorship, which began today, will eliminate the positions held by Fannie CEO Dan Mudd and Freddie CEO Dick Syron, but they will remain on board for a period of time to help with the transition. The FHFA will assume control of the board, and the vast majority of key professionals will remain in their jobs.
Together Freddie and Fannie own or back about $5.3 trillion in mortgages, which is about half the nation’s mortgage debt. The two government-sponsored enterprises were established to help create affordable mortgages and increase the availability of mortgage financing.
The situation to bail out Fannie and Freddie became evident last week when Freddie Mac was not able to sell mortgage bonds at a reasonable market value. The two enterprises have lost billions of dollars from high-risk bonds composed of defaulted home loans. Increased foreclosures over the past year have made it difficult for Fannie and Freddie to sell the debt and raise capital.
Jim B. Lockhart III, director of the FHFA, says yesterday’s action was attributed to a flawed business model embedded in the government sponsored enterprise (GSE) structure and to the ongoing housing correction.
“I have long said that the housing correction poses the biggest risk to our economy,” Lockhart says. “It is a drag on our economic growth, and at the heart of the turmoil and stress for our financial markets and financial institutions. Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner on housing.”
David Moffett, former CFO of U.S. Bancorp and senior adviser at the Carlyle Group, a private-equity firm, has been chosen to head up Freddie Mac. Herbert M. Allison, a former TIAA-CREF executive, was named chief executive officer of Fannie Mae.
The Treasury is hoping to help policymakers chart a course to resolve the systemic risk created by the inherent