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US government takes over mortgage giants Fannie Mae and Freddie Mac

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Published Date: 08 September 2008
By Hamish Rutherford
City Correspondent
FANNIE Mae and Freddie Mac, which hold nearly half of all American mortgages, are being taken over by the US government in one of the largest financial bailouts in the country's history.
US Treasury secretary Henry Paulson announced yesterday that an investigation into the state of the two companies and their funding requirements concluded it was essential to take action beyond simply investing in the companies, in the wake of a surge in mortgage defaults that had threatened to bring them down.

"Our economy and our markets will not recover until the bulk of this housing correction is behind us," Paulson said. "Fannie Mae and Freddie Mac are critical to turning the corner on housing."

Paulson said the companies were so large that a collapse would cause "great turmoil" in worldwide financial markets, deepening the credit crunch.

He said: "A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance."

Last week it was revealed that almost 9 per cent of Americans were either behind in mortgage payments or facing repossession, fuelling speculation that Washington-based Fannie Mae and Virginia-based Freddie Mac faced imminent collapse.

Under the deal the US government will assume responsibility for debts worth about £2.7 trillion, dwarfing the £100 billion the UK government assumed when it nationalised Northern Rock in February.

Outstanding mortgage debt in the US is worth about $12 trillion (£6.8 trillion).

The takeover was engineered by the Federal Housing Finance Agency and will see the US Treasury Department take an equity stake in both companies, pumping in at least $100bn, buying preferred shares. FHFA director James Lockhart said yesterday that the companies were being placed in "conservatorship", with a view to returning them one day to the private sector.

Fannie Mae chief executive Daniel Mudd and Freddie Mac chief executive Richard Syron agreed to the government assuming control on Saturday and have been told they will be sacked as part of the agreement.

However, Lockhart stressed yesterday that the pair were not personally responsible for the business model that led to the troubles, nor the market conditions that threatened to freeze the mortgage market.

Herbert Allison, the former chief executive of TIAA-Cref, one of the US's largest fund managers, will head Fannie Mae, while David Moffett, a former vice-chairman of US Bancorp, one of America's largest banks, will head Freddie Mac.

Federal Reserve chairman Ben Bernanke immediately endorsed the move, which he said would ensure "financial soundness" of the companies.

Additionally, the Treasury Department said it had set up a programme that allowed it to buy mortgage-backed securities held by Fannie Mae and Freddie Mac to pump additional funds into the mortgage sector. A collapse in the market for the securities has been blamed for a huge fall in mortgage lending, which has seen prices fall on both sides of the Atlantic.


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  • Last Updated: 07 September 2008 9:07 PM
  • Source: The Scotsman
  • Location: Edinburgh
  • Related Topics: Credit Crunch
 
1

miller financial consulting,

rochester michigan 08/09/2008 01:25:06
I warned my customers in January re this very occurrence.
2

Glasgow Expat,

Desert 08/09/2008 07:16:45
Is this bullish? Nationalise risk, privatise reward. Workers of the world unite I say.
3

Evan Owen,

Snowdonia 08/09/2008 07:29:07
"Lockhart stressed yesterday that the pair were not personally responsible"

How is that then?

Why is it that the 'big boys' at the lenders are never personally responsible for their company policy of indiscriminate lending?

How is it that the regulators are never responsible either? Or the government, the politicians, the valuers, the builders, the borrowers..

So, free markets don't work even when they are being regulated to extinction.
4

SouthernSkye,

08/09/2008 07:40:45
$3000billion of mortgages held by these two (according to BBC report yesterday). I cannot grasp such huge sums. Someone must be responsible for having laid out such an obviously flawed lending policy?
So, how long will we have the fall-out of "Le Crunch" for then? Estimates seem to vary from another 18 months to another 8 years.
What's your bet??
5

Rosscobhoy,

08/09/2008 11:15:57
Makes me glad i put a little bit of money in Banking stocks last month. Barclays at 290 per share was great value after this!
6

A Friend of Fernando Poo,

08/09/2008 11:23:00
#1: I warned people in 2003 that this was inevitable.

Fannie and Freddie should long ago have been broken up and the implicit Federal guarantee explicitly removed.
Unfortunately they had armies of lobbyists in Congress and paid substantial sums into both Democratic and Republican campaigns to keep the necessary from being done.

Sow the wind, reap the whirlwind. This starts Phase II of the credit bust and it will make this year's mortgage lending look like largesse. The idea seems to be that debt can be made to vanish by moving it on to the government's books. As Mises said when referring to credit busts though, "There is no mathematical solution to debt".
7

Rosscobhoy,

08/09/2008 13:11:47
#6

The point that i think is missing is that this will not make mortgages more affordable for you or me, and it will not mean thos behind in their payments can magically catch up. The problems within the housing market are still there.
8

Boab,

Glasgow 08/09/2008 13:47:42
So much for small government, eh Dubya?
9

Rosscobhoy,

08/09/2008 17:06:30
#9

Problem is it puts off the inevitable for a few more years. House prices have to come down if the market wants to attract more first time buyers. They may drop a little but not as much as they would have had the American Government not interefered. The knock on effects are that we will pay for it in 10 years as you say.
10

Itchy,

08/09/2008 19:02:50
This is a seriously bad idea. There is no such thing as a free lunch.
11

A Friend of Fernando Poo,

08/09/2008 19:25:36
#9 & #10: They had no choice. If Fannie and Freddie went under, we'd be looking at world financial collapse.

It won't make the difference everyone supposes though. It's likely to hit the Dollar sooner or later as folks realise just how much debt has been taken on.

If they run the GSEs to prevent taxpayer losses, that's more likely to increase mortgage rates than decrease them. It's still the bondholders rather than the Federal reserve who decide mortgage rates.

Then there's the US banks who'll have to take a hit on their preference shares. The Fed will have to mollycoddle them through this too.

The silver lining is that the army of lobbyists should be getting their severance orders today.
12

Sedov,

Scotland 08/09/2008 20:08:40
it is estimated that there are now 8 million households in the USA with negative equity and the numbers are increasing each day that the credit crunch lasts. The UK will follow . The US banks are $62 trillion in credit deficit against $4.5 trillion in mortgage holding, something has to give. The banks need to get back $800 billion from outstanding loans by the end of 2009 or else, in the face of no more hand outs by government, they are in danger of a wipe out 50 times greater than Northern Rock. The rescue package by the US treasury, which is in fact nationalisation now welcomed by the banks ( because obviously it suits them at present ) and big business across the globe and will cost the US tax payer dearly. So much for the "free market economy". In the meantime if we cannot pay our bills the gas and electricity will get cut off etc. No such support for the small business man or worker. The system is rotten to the core and things cannot continue like this.

13

ebbi,

spain 08/09/2008 20:18:48
this is a perfect business.i make money and keep the profits but when times are bad and i lose then my losses are yours.meanwhile i won´t be paying any taxes because of loopholes.perfect business but stupid governments.
14

ebbi,

spain 08/09/2008 20:23:27
Thomas Jefferson's Warning To America :

"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs." Written by Jefferson in a letter to the Secretary of the Treasury Albert Gallatin (1802).

Well you draw your own conclusion now!!!

 

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