Susan Walsh/AP
Treasury Secretary Henry Paulson, left, accompanied by Federal Reserve Board Chairman
Ben Bernanke

Government Takes Control of Fannie Mae and Freddie Mac

September 08, 2008 02:07 PM
by Anne Szustek
The U.S. Treasury put the flailing mortgage companies under federal conservatorship on Sunday. Shareholders, take note.

Markets Up, Fannie and Freddie Individual Shareholders Down

The U.S. Treasury put the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac) under a conservatorship controlled by the Federal Housing Finance Authority, Treasury Secretary Henry Paulson announced Sunday night.

According to The Wall Street Journal, the government is acquiring $1 billion in preferred shares of both Fannie Mae and Freddie Mac, which were already government backed.

The Treasury Department is also undertaking another program to buy $5 billion in mortgage-backed securities, which could help to lower interest rates on mortgages. The rate for a 30-year, fixed-rate mortgage is generally above 6 percent, in spite of the Federal Reserve’s series of interest rate cuts over the past several months.

“Our economy will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner on housing,” Paulson was quoted as saying by The Washington Post.

Fannie Mae CEO Daniel Mudd is being replaced by Herb Allison, former chair of investment company TIAA-CREF. Former U.S. Bank vice-chair and CFO David Moffett is taking the helm at Freddie Mac from now-former CEO Richard Syron.

Strictly speaking, a conservatorship means that one organization takes another organization under control for a temporary period of time with the goal of rehabilitating it to normal and then reliquishing control. But although the Treasury has capped both companies’ mortgage portfolios at $850 billion as of the end of 2009, The Wall Street Journal reports that the “Treasury’s move doesn’t answer the question of what ultimately happens to Fannie and Freddie.” That decision rests with Congress. Shares of both Fannie Mae and Freddie Mac are still to be traded on the New York Stock Exchange.

Fannie and Freddie’s sustainability is all important, given that they are among the few major mortgage lenders left standing after the sub-prime crisis of the past two years—as well as the fact that they are largely interwoven with global markets.

Asian markets rallied Monday morning local time on the back of the news of the U.S. government takeover of the mortgage companies. Hong Kong’s Hang Seng opened 4.5 percent higher and Japan's Nikkei soared more than 3 percent, according to The Wall Street Journal.

Financial blog 24/7 Wall Street wrote that Lehman Brothers, AIG, Annaly Capital Management, and Washington Mutual, each contending with their own market sustainability woes, stand to gain from the government takeover.

Individual shareholders may stand to lose more than they reap, however. Under the conservatorship, “they stand last in line for any money the two companies make,” writes BusinessWeek. Plus, starting in 2010, both companies must decrease their mortgage holdings by 10 percent annually until they are each down to $250 billion. Currently, Freddie Mac has some $798 billion in mortgages and other securities. Fannie Mae has about $758 billion.

Billionaire investor Warren Buffett said on CNBC Monday morning that the two companies’ massive mortgage holdings spelled their downfall. He supported the government’s move, saying that it “had no choice but to do something. And then the question is: did they do the most sensible thing, and they did do that.”

Sunday’s move is just the latest in the U.S. government’s intervention to keep the two companies afloat. Treasury Secretary Henry Paulson announced the evening of July 13 that he was asking Congress for speedy approval of authority for the federal government to provide financial support to Fannie and Freddie. A week earlier, rumors about the two companies’ insolvency cut the value of their shares nearly in half.

As government-sponsored entities (GSEs), the two companies had enjoyed an implied federal guarantee of their obligations, and thus investors have allowed the GSEs to carry far more debt than would be allowed by an entity without the implicit federal guarantee.

See CBS News coverage

Background: The decline of the two state-sponsored mortgage lenders; July 13 announcement


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