Bush: Takeover of housing giants 'critical'
AP: Sunday, September 07, 2008 WASHINGTON -
President Bush said Sunday that the historic federal government takeover of mortgage giants Fannie Mae and Freddie Mac is needed to keep them from failing, a risk he called "unacceptable" for an economy battered by housing and credit crises.
"Allowing the companies to fail or further deteriorate would damage our home mortgage market, and could weaken other credit markets that are unrelated directly to housing," Bush said in a statement released Sunday afternoon.
"Americans should be confident that the actions taken today will strengthen our ability to weather the housing correction and are critical to returning the economy to stronger sustained growth."
The Bush administration announced Sunday it was taking control of the two institutions to avert the potential for major financial turmoil.
The companies, which together own or guarantee about $5 trillion in home loans, about half the nation's total, have lost $14 billion in the last year and are likely to pile up billions more in losses until the housing market begins to recover.
Both companies were placed into a government conservatorship that will be run by the Federal Housing Finance Agency, the new agency created by Congress this summer to regulate Fannie and Freddie.
The executives and board of directors of both institutions are being replaced. In a statement, the president called the moves temporary until the appropriate role for the companies can be determined.
He said they must be reformed so that "they not pose similar risks to our economy or the financial system again."
Treasury Secretary Henry Paulson said the actions were being taken because the failure of either of the mortgage companies "would cause great turmoil in our financial markets here at home and around the globe."
The huge potential liabilities facing each company could cost taxpayers tens of billions of dollars. But Paulson stressed that the financial impacts if the two companies had been allowed to fail would be far more serious.
Bush said the federal regulator for Fannie Mae and Freddie Mac determined they could no longer operate safely and conduct their public mission. He said that posed "an unacceptable risk to the broader financial system and our economy."
U.S. taking over mortgage giants
Plan to rescue Fannie Mae, Freddie Mac could cost taxpayers billions.
By Martin Crutsinger, Alan Zibel ASSOCIATED PRESS Monday, September 08, 2008
WASHINGTON — The Bush administration's seizure of troubled mortgage giants Fannie Mae and Freddie Mac amounts to what could be a $200 billion bet that it will help reverse a prolonged housing and credit crisis.
The historic move, announced Sunday, won support from many sides, but some analysts worried that it may not be enough to stabilize the slumping housing market given the glut of vacant homes for sale, increasing foreclosures, rising unemployment and weak consumer confidence.
Officials announced that both institutions were being placed in a government conservatorship, a legal status similar to bankruptcy.
...U.S. Treasury Secretary Henry Paulson said that allowing the companies to fail would have hurt consumers more. The failures would "create great turmoil in our financial markets here at home and around the globe" and drive up the cost of home loans and all other types of borrowing, he said.
The companies, which together own or guarantee about $5 trillion in home loans — about half the nation's total mortgage debt — have lost $14 billion in the past year and are likely to be hit with billions more in losses until the housing market begins to recover.
Mark Zandi, chief economist at Moody's Economy.com, predicted that after the takeover, interest rates for 30-year mortgages could dip from the current nationwide average of 6.35 percent to close to 5.5 percent.
That could happen because investors are expected to be more willing to buy the debt issued by Fannie Mae and Freddie Mac, and at lower rates, with the federal government explicitly backing that debt.
"Effectively, the federal government has now become the nation's mortgage lender," he said. "This takes a major financial threat off the table."
Futures on all major stock indexes rose about 2 percent in electronic trading Sunday night.
The Treasury Department said that if necessary, it was prepared to put up as much as $100 billion in each of the companies over time to keep them from going broke in exchange for senior preferred stock.
The department will immediately be issued $1 billion of such stock from each company, which will pay 10 percent interest. Further purchases of preferred stock will be triggered if quarterly audits find that the companies' capital cushion — the assets they are required to have to cover losses — is below prudent standards.
The government, which will receive warrants representing ownership stakes of 79.9 percent in each company, is hoping that its moves will reassure nervous investors that they can continue to buy the debt of the two companies...
,,,Fannie Mae was created during the Great Depression, and Freddie Mac in 1970, to help make mortgages more affordable for homeowners. The companies buy billions of dollars in mortgages each month from commercial lenders.
Some are sold to investors as mortgage-backed securities; others are held by the companies in their investment portfolios. This process provides banks with more money to make more home loans, which expands home ownership.
The conservatorship will be run by the Federal Housing Finance Agency, which was created by Congress this summer to regulate Fannie Mae and Freddie Mac.
That happened at the same time that Congress expanded the power of the Treasury Department to make loans to the two companies. But their financial situations didn't improve, and officials feared that a crisis of confidence could spread through the worldwide financial system...
...Analysts were split on how much the takeover could cost taxpayers, although they agreed that the upfront costs will be substantial, possibly hitting $100 billion as the Treasury has to bolster the capital cushions at both institutions.
However, if the plan stabilizes the housing market and home prices rebound, the assets of Fannie Mae and Freddie Mac should rise in value, and the government should be able to sell off the companies and recoup its investments.
But it could take a long time to work through that process.
"I think the government will end up having to put in far more money than they are planning right now (given all the problems facing housing), but the important thing is the agencies have been taken over by the government," said Sung Won Sohn, an economics professor at California State University Channel Islands.
That means there will be less panic in financial markets."
See Related Story: http://reversemortgagesnow.blogspot.com/2008/09/who-are-fannie-and-freddie-to-home-loan.html
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