US government takes over mortgage giants Fannie Mae and Freddie Mac

Published on Sunday 7 September 2008 21:48

FANNIE Mae and Freddie Mac, which hold nearly half of all American mortgages, are being taken over by the US government in one of the largest financial bailouts in the country's history.

US Treasury secretary Henry Paulson announced yesterday that an investigation into the state of the two companies and their funding requirements concluded it was essential to take action beyond simply investing in the companies, in the wake of a surge in mortgage defaults that had threatened to bring them down.

"Our economy and our markets will not recover until the bulk of this housing correction is behind us," Paulson said. "Fannie Mae and Freddie Mac are critical to turning the corner on housing."

Paulson said the companies were so large that a collapse would cause "great turmoil" in worldwide financial markets, deepening the credit crunch.

He said: "A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance."

Last week it was revealed that almost 9 per cent of Americans were either behind in mortgage payments or facing repossession, fuelling speculation that Washington-based Fannie Mae and Virginia-based Freddie Mac faced imminent collapse.

Under the deal the US government will assume responsibility for debts worth about 2.7 trillion, dwarfing the 100 billion the UK government assumed when it nationalised Northern Rock in February.

Outstanding mortgage debt in the US is worth about $12 trillion (6.8 trillion).

The takeover was engineered by the Federal Housing Finance Agency and will see the US Treasury Department take an equity stake in both companies, pumping in at least $100bn, buying preferred shares. FHFA director James Lockhart said yesterday that the companies were being placed in "conservatorship", with a view to returning them one day to the private sector.

Fannie Mae chief executive Daniel Mudd and Freddie Mac chief executive Richard Syron agreed to the government assuming control on Saturday and have been told they will be sacked as part of the agreement.

However, Lockhart stressed yesterday that the pair were not personally responsible for the business model that led to the troubles, nor the market conditions that threatened to freeze the mortgage market.

Herbert Allison, the former chief executive of TIAA-Cref, one of the US's largest fund managers, will head Fannie Mae, while David Moffett, a former vice-chairman of US Bancorp, one of America's largest banks, will head Freddie Mac.

Federal Reserve chairman Ben Bernanke immediately endorsed the move, which he said would ensure "financial soundness" of the companies.

Additionally, the Treasury Department said it had set up a programme that allowed it to buy mortgage-backed securities held by Fannie Mae and Freddie Mac to pump additional funds into the mortgage sector. A collapse in the market for the securities has been blamed for a huge fall in mortgage lending, which has seen prices fall on both sides of the Atlantic.