FACTBOX: Options of a government bailout of Fannie, Freddie

NEW YORK (Reuters) - Shares of U.S. mortgage finance giants Fannie Mae and Freddie Mac have plunged this week amid growing expectations that the government will need to take steps to rescue the two shareholder-owned, but Congressionally chartered companies.

A government bailout is seen wiping out the value of the stock of the two government-sponsored enterprises.

The bonds of the two GSEs, however, have been rallying because a government bailout strengthens their tie to the government, therefore improving the credit-worthiness of the securities, analysts say. As the United States suffers the worst housing market downturn since the Great Depression, the two GSEs' ability to fund mortgages through the issuance of debt is considered crucial at this juncture.

Last month, Congress granted the U.S. Treasury temporary authority to take an equity stake in the companies or loan them money.

Below are possible options of a government bailout:

Option 1:

The U.S. Treasury Department takes an equity stake in the companies, a scenario that some analysts said is the most probable.

This could be through the purchase of preferred or senior preferred shares. If the Treasury buys at a high price, it could benefit shareholders, and at a low price, it could do the opposite, analysts said. This move would essentially make the Treasury a de facto owner of the companies.

Given the GSEs' current loss and delinquency rates, any capital raise would prevent a full scale nationalization for some time, but what would cause the Treasury to take an equity stake is unclear, according to Credit Suisse research.

A decline in the share prices does not necessarily force such an action, the company said.

The Treasury taking some type of a preferred equity stake in the GSEs is the most probable scenario, according to UBS AG research.

Should the Treasury take some type of a preferred equity stake in the GSEs it could possibly renew pressure on the GSEs' common stock, which is below preferred in the capital structure, albeit solidifying protection of the companies' U.S. mortgage-backed securities/senior debt holders, UBS said.

UBS said there is historical precedent for the Treasury to take a preferred equity stake in the GSEs. In 1954, when Congress began turning Fannie Mae from a fully government supported organization into a partly private company, the Treasury was issued nonvoting preferred stock as a method for funding the transition. In 1968, Fannie Mae was split into two organizations -- the explicitly government-backed Ginnie Mae, and the fully private corporation Fannie Mae. At that time the preferred stock of the Treasury Department was retired.

Option 2:

The U.S. Treasury Department purchases U.S. mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac.

Even modest purchases of mortgage bonds would probably support mortgage bond yield spreads against Treasuries, but how long this support would last would partly be determined by how far the Treasury is willing to go in leaving its willingness to purchase mortgage bonds open ended, Credit Suisse said.

Option 3:

The U.S. Treasury Department purchases senior agency debt.

This could emerge if discount note liquidity becomes much less than it has recently and retained portfolios funding comes into question, Credit Suisse said.

Option 4:

Nationalization of the GSEs.

An option that could occur if the GSEs become severely under-capitalized, essentially becoming insolvent.

The shareholders' equity is not marked to market and so a declining share price does not force such an event, but credit losses or additional losses or additional markdowns causing regulatory capital to fall below government-mandated minimums would increase the possibility of this option, Credit Suisse said.

If nationalization occurs, a conservatorship is seen, which implies that the government will operate the failed GSE as is without a liquidation--at least initially, the company said.

Option 5:

Fannie Mae and Freddie Mac reduce their purchases of home loans and related securities to conserve capital.

This would reduce the flow of funds to the market and push interest rates higher for consumers, hurting the already hard-hit U.S. housing market and prolonging its slump, analysts say.

Option 6:

Restructure the GSEs.

Perhaps create a National Secondary Mortgage Market System that would replicate the current Federal Home Loan Bank System, Richard Bove, analyst at Ladenburg Thalmann & Co. in Lutz, Florida, said in a research report.

Bove said in this scenario there would be 12 regional secondary mortgage market banks and these banks would be owned by their customers, such as the banks, thrifts, and others who use the secondary mortgage market services.

(Reporting by Julie Haviv; Editing by Leslie Adler)