Fannie, Freddie need restructuring to limit risks: IMF

FRANKFURT (Reuters) - The U.S. government’s move to take control of Fannie Mae and Freddie Mac will help shore up the housing market, the banking system and the wider economy, a senior International Monetary Fund official said on Tuesday.

First Deputy Managing Director of the International Monetary Fund (IMF) John Lipsky holds a media briefing during the Asia-Pacific Economic Cooperation (APEC) Finance Ministers Meeting at Coolum August 2, 2007. REUTERS/Mick Tsikas

In the text of a speech in Frankfurt, IMF first deputy managing director John Lipksy also said the two mortgage giants would need to be restructured over the longer term.

“The intervention in (Fannie Mae and Freddie Mac) and the broader support to the mortgage market should stabilize (their) balance sheets and the funding of mortgages in the near term,” Lipsky said.

“This will help underpin the U.S. housing market, the banking system, and the broader economy.”

U.S. mortgage rates fell on Monday after the government seized control of Fannie and Freddie, raising hopes the plan would provide at least temporary respite from troubles in housing and credit markets.

The government committed up to $200 billion to support the two lenders, which together back about half the country’s $12 trillion in mortgages.

Stock prices rallied around the world as investors felt that federal backing could ease some of the pain that has afflicted the financial system for more than a year.

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Lipsky said on Tuesday authorities should continue to encourage financial firms to strengthen their capital positions.

The U.S. administration had addressed “moral hazard concerns” over intervention in Fannie and Freddie by diluting common and preferred shares of stockholders and replacing management, he added.

“Over the longer term, the restructuring of (Fannie and Freddie) remains essential to restore market discipline, minimize fiscal costs, and limit future systemic risks,” he said.

“(Fannie and Freddie) are in no-man’s-land between public and private ownership and this needs to be resolved.”

Reporting by Iain Rogers in Berlin; Editing by Ruth Pitchford