Feds take over Fannie, Freddie

Federal officials announced today a takeover of Fannie Mae and Freddie Mac. In a statement this morning, Treasury Secretary Henry Paulson and Federal Housing Finance Agency Director Jim Lockhart outlined a four-pronged plan to stabilize the two struggling mortgage giants.

"We examined all options available, and determined that this comprehensive and complementary set of actions best meets our three objectives of market stability, mortgage availability and taxpayer protection," Paulson said.

The plan:

1. FHFA will take over Fannie and Freddie via conservatorship. The CEOs of both companies will be dismissed, and federal officials will assume control..
2. Treasury and FHFA have established contract agreements under which the Treasury Department will ensure both companies remain solvent while protecting taxpayers as much as possible. Under these "Preferred Stock Purchase Agreements," Treasury will receive senior preferred equity shares. Common and preferred shareholders will suffer losses before the government.
3. Treasury has established a secured lending credit facility for Fannie Mae, Freddie Mac, and other federally backed banks in order to lend money to agencies in need.
   
4. Treasury is initiating a temporary program to buy mortgage-backed securities in order to stabilize rates and ease the market. The program will end in December 2009, when Treasury's expanded power over government-sponsored enterprises such as Fannie Mae and Freddie Mac expires.
   

Federal officials said the takeover was necessary to safeguard the U.S. economy and to protect taxpayers.

"Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe," Lockhart said. "This turmoil would directly and negatively impact household wealth: from family budgets, to home values, to savings for college and retirement."

Treasury Department press release and fact sheets here.

Fed Chairman Ben Bernanke approves: "These necessary steps will help to strengthen the U.S. housing market and promote stability in our financial markets. I also welcome the introduction of the Treasury's new purchase facility for mortgage-backed securities, which will provide critical support for mortgage markets in this period of unusual credit-market uncertainty."

From today's Associated Press story:

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.

(snip)

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."