WASHINGTON (Reuters) - The U.S. government on Sunday seized control of mortgage finance companies Fannie Mae and Freddie Mac in an aggressive move to help the distressed U.S. housing market and economy.
Officials were concerned mounting losses at the two companies, which own or guarantee almost half of the country’s $12 trillion in outstanding home mortgage debt, was sapping their vitality and threatening to undermine them at a time other sources of housing finance have largely run dry.
“Our economy and our markets will not recover until the bulk of this housing correction is behind us,” U.S. Treasury Secretary Henry Paulson said at a news conference. “Fannie Mae and Freddie Mac are critical to turning the corner on housing.”
The decision to take control of the companies, which have $1.6 trillion in debt outstanding, and place them into a conservatorship under their regulator could amount to the largest financial bailout in U.S. history. The Treasury Department, which is taking an equity stake in the two firms, said there was no reason to expect that taxpayers would have to shoulder losses.
The companies have suffered combined losses of nearly $14 billion in the last four quarters and large holders of their debt, including overseas central banks, have begun to show signs of increasing nervousness over their financial health.
“I strongly endorse both the decision by (Federal Housing Finance Agency) Director (James) Lockhart to place Fannie Mae and Freddie Mac into conservatorship and the actions taken by Treasury Secretary Paulson to ensure the financial soundness of those two companies,” Federal Reserve Chairman Ben Bernanke said in a statement.
“These necessary steps will help to strengthen the U.S. housing market and promote stability in our financial markets,” he said.
As part of the plan, FHFA will operate the companies until they are stabilized and the Treasury will extend financing until Dec. 31, 2009, if needed.
In addition to the new financing facility, Treasury said it will take an equity stake in the two firms through senior preferred equity shares and warrants.
“Under the terms of the agreement, common and preferred shareholders bear losses ahead of the new government senior preferred shares,” Paulson said.
Treasury also set up a program under which it would buy mortgage-backed securities currently held by Fannie Mae and Freddie Mac to pump fresh funds into the mortgage market. It said it would begin buying MBS later this month, and it would have authority to make such purchases through Dec. 31, 2009.
The stocks of the two companies have fallen more than 90 percent in the past year and in recent months foreign investors have pared their holdings of the companies’ securities.
Paulson said that Fannie Mae and Freddie Mac were so large that “a failure of either of them would cause great turmoil in our financial markets here at home and around the globe.”
Additional reporting by David Lawder