US Government takes over mortgage giants By MARTIN CRUTSINGER and
ALAN ZIBEL AP Business Writers WASHINGTON (AP) -- The Bush
administration's seizure of troubled mortgage giants Fannie Mae
and Freddie Mac is potentially a $200 billion bet that it will help
reverse a prolonged housing and credit crisis. The historic move
announced Sunday won support from both presidential campaigns, but
private analysts worried that it may not be enough to stabilize the
slumping housing market given the glut of vacant homes for sale,
rising foreclosures, rising unemployment and weak consumer
confidence. Officials announced that both giant institutions were
being placed in a government conservatorship, a move that could end
up costing taxpayers billions of dollars. Treasury Secretary Henry
Paulson said allowing the companies to fail would have extracted a
far higher price on consumers by driving up the cost of home loans
and all other types of borrowing because the failures would
"create great turmoil in our financial markets here at home
and around the globe." Mark Zandi, chief economist at
Moody's Economy.com predicted that 30-year mortgage rates,
currently averaging 6.35 percent nationwide, could dip to close to
5.5 percent. That's because investors will be more willing to
buy the debt issued by Fannie and Freddie _ and at lower rates _
since the federal government is now explicitly standing behind that
debt. "Effectively, the federal government has now become the
nation's mortgage lender," he said. "This takes a
major financial threat off the table." Futures on all major
stock indexes rose about 2 percent in electronic trading Sunday
night, another sign of investor relief about the takeover plan The
companies, which together own or guarantee about $5 trillion in
home loans, about half the nation's total, have lost $14
billion in the last year and are likely to pile up billions more in
losses until the housing market begins to recover. The Treasury
Department said it was prepared to put up as much as $100 billion
over time in each of the companies if needed to keep them from
going broke, in exchange for senior preferred stock. Treasury will
immediately be issued $1 billion of such stock from each company,
which will pay 10 percent interest. Further purchases of preferred
stock will be triggered if quarterly audits find that the
companies' capital cushion is below prudent standards. The
government, which will receive warrants representing ownership
stakes of 79.9 percent in each company, is hoping that its moves
will reassure nervous investors that they can continue to buy the
debt of the two companies. In a statement, President Bush said,
"Americans should be confident that the actions taken today
will strengthen our ability to weather the housing correction and
are critical to returning the economy to stronger sustained
growth." Democratic presidential nominee Barack Obama issued a
statement agreeing that some form of intervention was necessary,
and promised, "I will be reviewing the details of the Treasury
plan and monitoring its impact to determine whether it achieves the
key benchmarks I believe are necessary to address this
crisis." Republican presidential nominee John McCain also
voiced support while his running mate, Alaska Gov. Sarah Palin,
said that Fannie and Freddie "have gotten too big and too
expensive to the taxpayers. The McCain-Palin administration will
make them smaller and smarter and more effective for homeowners who
need help." The conservatorship will be run by the Federal
Housing Finance Agency, the new agency created by Congress this
summer to regulate Fannie and Freddie, a move taken at the same
time that Congress greatly expanded the power of the Treasury
Department to make loans to the two companies and purchase their
stock. The executives and board of directors of both institutions
are being replaced. Herb Allison, the former head of the TIAA-CREF
retirement investment fund, was selected to head Fannie Mae, and
David Moffett, a former vice chairman of US Bancorp, was picked to
head Freddie Mac. Paulson was careful not to blame Daniel Mudd, the
outgoing CEO of Fannie Mae, or Freddie Mac's departing CEO
Richard Syron for the companies' current problems. While both
men are being removed as the top executives, they have been asked
to remain for an unspecified period to help with the transition.
Fannie and Freddie both purchase home loans from banks and then
repackage those loans as mortgage-backed securities which they
either hold on their own books or sell to investors around the
globe. This process provides banks with more money to make more
home loans, greatly expanding home ownership. The impact of the
government takeover on existing common and preferred shares, which
have slumped in value in the last year, will depend on how
investors react to Paulson's assertion that they must absorb
the cost of further losses first. Under the plan, dividends on both
common and preferred stock would be eliminated, saving about $2
billion a year. After the Treasury Department's announcement,
credit rating agency Standard & Poor's downgraded Fannie
and Freddie's preferred stock to junk-bond status, but
reaffirmed the U.S. government's triple-A rating. The Federal
Reserve and other federal banking regulators said in a joint
statement Sunday that "a limited number of smaller
institutions" have significant holdings of common or preferred
stock shares in Fannie and Freddie, and that regulators were
"prepared to work with these institutions to develop
capital-restoration plans." The Fed released a letter from Fed
Chairman Ben Bernanke to James Lockhart, the director of the
Federal Housing Finance Agency, in which the Fed chief said he
concurred in Lockhart's decision to take control of Fannie and
Freddie saying the action "will help ensure the safe and sound
operation of the enterprises." Analysts were split on how much
the takeover could eventually cost taxpayers although they all
agreed the up-front costs will be substantial, possibly hitting
$100 billion as the Treasury is called upon to bolster the capital
cushions at both institutions. However, if the plan does the trick
of stabilizing the housing market and home prices stop falling and
rebound, then the assets of both Fannie and Freddie should rise in
value and the government should be able to sell off the companies
and recoup its investments. But it could take a long time to work
through that process given all the headwinds facing housing at the
moment from the plunge in home prices to soaring defaults on
mortgages which are dumping more homes on an already glutted
market. The weak economy has pushed unemployment to a five-year
high of 6.1 percent, further reducing demand for homes. "I
think the government will end up having to put in far more money
then they are planning right now (given all the problems facing
housing) but the important thing is the agencies have been taken
over by the government," said Sung Won Sohn, an economics
professor at California State University Channel Islands.
"That means there will be less panic in financial
markets." Under government control, the companies will be
allowed to expand their support for the mortgage market over the
next year by boosting their holdings of mortgage securities they
hold on their books from a combined $1.5 trillion to $1.7 trillion.
Starting in 2010, though, they are required to drop their holdings
by 10 percent annually until they reach a combined $500 billion. In
addition, officials said the Treasury Department plans to purchase
$5 billion in mortgage-backed securities issued by the two
companies later this month, the first of a series of purchases
planned by the government in an effort to bolster for these
securities, which was badly shaken a year ago when the credit
crisis first erupted with soaring defaults on subprime mortgages.
Paulson said that it would be up to Congress and the next president
to figure out the two companies' ultimate structure and the
conflicting goals they operated under _ maximizing returns for
shareholders while also being required to facilitate home buying
for low- and moderate-income Americans. "There is a consensus
today ... that they cannot continue in their current form," he
said. Members of Congress will be watching in the coming months to
see how the takeover works, but more housing legislation appears
unlikely until next year given the few weeks remaining both
Congress quits to hit the campaign trail. Sen. Charles Schumer,
D-N.Y. said the intervention was sparked by worries within the Bush
administration that foreign governments would stop holding Fannie
and Freddie's debt. "This was the prudent course to
take," he said. Senate Banking Committee Chairman Chris Dodd,
D-Conn., announced his committee would hold hearings on the
takeover to address a number of unanswered questions so that the
American people will know "if this unprecedented proposal will
help keep mortgages affordable, stabilize the markets and protect
taxpayer interests." Lockhart said that all lobbying
activities of both companies would stop immediately. Both companies
over the years made extensive efforts to lobby members of Congress
in an effort to keep the benefits they enjoyed as
government-sponsored enterprises. Sunday's actions followed a
series of meetings Paulson had with Bush and other top
administration economic officials with Bush relying heavily on the
judgment of Paulson, who was the head of investment giant Goldman
Sachs before he joined the Cabinet in 2006. "It is really an
assent to Hank's direction, guidance and judgment," said a
senior administration official, who spoke on condition of anonymity
to discuss behind-the-scenes deliberations. ___ Associated Press
Writer Ben Feller in Washington contributed to this report.
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