September 7, 2008 / 5:50 PM / 11 years ago

Treasury to buy $5 bln in Fannie, Freddie MBS

WASHINGTON (Reuters) - The U.S. Treasury expects to purchase $5 billion of Fannie Mae and Freddie Mac mortgage-backed securities within the next month as part of its takeover of the mortgage finance giants.

Senior government officials told reporters in a news briefing the program would be the first taxpayer cash outlays associated with the plan to put Fannie Mae and Freddie Mac into a government conservatorship.

The purchases will be on the open market and will be managed by a private investment manager appointed by the Treasury.

This week, the Treasury will receive $1 billion in a new class of senior preferred stock from each of the two companies as “compensation” for signing the agreement to support the two main sources of U.S. mortgage liquidity, the officials said. This stock has a 10 percent coupon.

The Treasury also will receive warrants representing 79.9 percent ownership share of each firm, but the officials said the government has no plans to exercise those warrants, which carry a nominal exercise cost of less than $1 a share.

The officials said the Treasury has set up an automatic mechanism to inject fresh capital into Fannie Mae and Freddie Mac through senior preferred stock purchases when their liabilities exceed their assets according to their quarterly financial reports. The earliest this could start would be within 60 days of the companies’ September 30 report, the officials said.

The current limit on the quarterly preferred stock purchases of $100 billion per institution was a figure chosen “to provide market stability”, they added.

The officials insisted the federal takeover of the two government-sponsored enterprises was not analogous to a bank failure, in which an insolvent institution is put into receivership and its deposits shifted to other banks and its shareholder equity eliminated. They said Fannie Mae and Freddie Mac would continue as going concerns and common and existing preferred shareholders would not be wiped out.

The step was taken largely because a lack of market confidence in Fannie and Freddie impaired their ability to raise new equity capital in the face of mounting credit losses, threatening to cut off the flow of new mortgages to homebuyers and worsen the U.S. housing collapse.

Through consultations with the Federal Reserve, the new Federal Housing Finance Agency and Treasury GSE adviser Morgan Stanley, hired just a few weeks ago, Treasury officials decided they had to step in.

“It became clear ... the financial conditions of the GSEs is deteriorating. There are growing losses in their credit book and their ability raise capital in private markets were impaired throughout the summer and through the fall here,” one of the officials said.

Reporting by David Lawder; Editing by Neil Stempleman

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