August 23, 2008 / 1:37 AM / 11 years ago

Treasury wants GSEs shareholder-owned: source

WASHINGTON (Reuters) - The U.S. Treasury Department still believes that housing finance giants Fannie Mae FNM.N and Freddie Mac FRE.N should remain shareholder-owned, a source familiar with Treasury thinking said on Friday.

The corporate logo for Freddie Mac is seen at its headquarters building in McLean, Virginia, July 23, 2008. REUTERS/Larry Downing

Shares of Fannie Mae and Freddie Mac fell further this week after news reports suggested the federal government was poised to nationalize the two companies, which together underwrite or guarantee nearly half of the $12 trillion U.S. mortgage market.

Treasury Secretary Henry Paulson last month outlined a series of backstop measures that could be used to support Fannie Mae and Freddie Mac, including a fresh injection of capital from the government. Speculation has mounted in financial markets that Treasury eventually would be forced to add capital, causing investors to question how such a move could affect the corporate structures.

When Paulson announced the lifeline for Fannie Mae and Freddie Mac in July, he and President George W. Bush both said that government policy aimed to maintain the government-sponsored enterprises as private enterprises.

The U.S. Congress backed the proposal in July and on Friday, the White House said that Paulson has unencumbered power to deal with the current crisis as he sees fit.

“Secretary Paulson has the lead on the administration’s policies related to Fannie Mae and Freddie Mac, working with their regulator,” White House spokesman Tony Fratto said.

As the United States suffers the worst housing market downturn since the Great Depression, the two companies’ ability to fund mortgages through the issuance of debt to support the U.S housing market is considered crucial for the economy.

Shares of Fannie Mae closed up 3.1 percent at $5.00 on Friday, a day after hitting a roughly two-decade low of $3.53, and down 37 percent for the week. Freddie Mac shares closed down 11.1 percent at $2.81, after earlier hitting a 20-year low of $2.50, and down by more than half for the week.

Investors have pummeled common and preferred shares of Fannie Mae and Freddie Mac this year as speculation grew that the pace of losses on their mortgage holdings and guarantees is quickly eroding their capital. Both Fannie Mae and Freddie Mac have both lost about 90 percent of their market capitalization since 2008 began.

The two GSEs have reported losses for the past four quarters, and mortgage delinquency rates are rising, reducing the value of their assets and their capital, but they currently meet regulatory capital requirements and are successfully rolling over their debt on the regular schedule, limiting the need for any nationalization by the government.

Paulson and Federal Reserve Chairman Ben Bernanke have both encouraged the companies to raise capital in recent months so that they will have the ballast to weather the current U.S. housing market downturn.

When policy-makers hatched their plan to buttress Fannie Mae and Freddie Mac in July, they hoped that merely outlining the plan would sooth investor concerns. As the companies have reported bigger losses, however, investor anxiety has risen along with expectations that the government will have to take action.

Still, officials have repeated that they do not want the companies to fall completely into government hands.

Legislation that codified the Treasury rescue plan states that any government aid to Fannie Mae and Freddie Mac should bear in mind “the need to maintain the corporation’s status as a private shareholder-owned company.”

Editing by Leslie Adler

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