Fannie Mae may tap government cash to avoid liquidation

By Lynn Adler - Analysis

NEW YORK (Reuters) - Just three months after the U.S. government took over Fannie Mae, the biggest source of housing finance may need an infusion of fresh capital to stay in business.

Unfortunately for the American taxpayer, the Treasury may be forced to pump up to $100 billion to stop the company from swinging from the "conservatorship" status it acquired when the government took control of the company and its rival Freddie Mac to a "receivership" situation that would involve selling off assets to pay creditors.

The U.S. Treasury Department stands ready to inject $100 billion into each company to avert receivership. If Fannie Mae or Freddie Mac shut down, mortgage rates would soar, making it enormously difficult for the housing market to climb out of the worst slump since the Great Depression.

"Receivership is really not tenable" because of the importance of Fannie and Freddie to the economy, said Fred Cannon, chief equity strategist at Keefe, Bruyette & Woods in San Francisco.

A Treasury infusion for Fannie Mae and Freddie Mac would boost market confidence in the government's guarantee. Debt costs would drop and market access should increase, as a result, smoothing the companies' ability to fund mortgage purchases and help stabilize housing, analysts said.

Conservatorship aims to preserve Fannie Mae's assets as it works toward restoring health. The company on Monday reported a record $29 billion loss in the third quarter.

"If receivership meant liquidation, that would be the last thing that the U.S. mortgage market needs," Cannon said, adding that a capital infusion is likely before year end.

Conservatorship is not a long-term solution, but "I don't see any reason to push them into receivership prior to Congress addressing the structure of Fannie Mae and Freddie Mac" in the new administration.

The U.S. seized Fannie Mae (FNM.P) and its smaller rival Freddie Mac (FRE.P) in early September, saying the companies were so battered by the mortgage meltdown that they risked being unable to fulfill their mission of aiding housing.

Fannie Mae said its regulator, the Federal Housing Finance Agency, must place it into receivership if its assets fall below obligations, or if it has not paid debts, for 60 days.

"We do not know whether we will exist in the same or a similar form or continue to conduct our business as we did before the conservatorship, or whether the conservatorship will end in receivership," Fannie Mae said.

If worsening housing and financial markets result in a sharp net loss again in the fourth quarter, and Fannie Mae's assets are worth less than its liabilities at year end, the company said it will have to tap funds from the Treasury to avoid a mandatory receivership trigger under current statute.

"Unlike a conservatorship, the purpose of which is to conserve our assets and return us to a sound and solvent condition, the purpose of receivership is to liquidate our assets and resolve claims against us," the company noted in its quarterly filing.

Treasury Secretary Henry Paulson has said that conservatorship should be viewed as a "time out" while policymakers decide the companies' future role and structure.

Fannie Mae and Freddie Mac own or guarantee about half of U.S. mortgages.