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  1. #1
    Damage your reputation seenbad's Avatar
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    Default Uncle Sam takes over Freddie and Fannie

    US Government takes over mortgage giants


    Sep 7, 9:51 PM (ET)

    By MARTIN CRUTSINGER and ALAN ZIBEL

    WASHINGTON (AP) - The Bush administration's seizure of troubled mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE) is potentially a $200 billion bet that it will help reverse a prolonged housing and credit crisis.

    The historic move announced Sunday won support from both presidential campaigns, but private analysts worried that it may not be enough to stabilize the slumping housing market given the glut of vacant homes for sale, rising foreclosures, rising unemployment and weak consumer confidence.

    Officials announced that both giant institutions were being placed in a government conservatorship, a move that could end up costing taxpayers billions of dollars. Treasury Secretary Henry Paulson said allowing the companies to fail would have extracted a far higher price on consumers by driving up the cost of home loans and all other types of borrowing because the failures would "create great turmoil in our financial markets here at home and around the globe."

    Mark Zandi, chief economist at Moody's Economy.com predicted that 30-year mortgage rates, currently averaging 6.35 percent nationwide, could dip to close to 5.5 percent. That's because investors will be more willing to buy the debt issued by Fannie and Freddie - and at lower rates - since the federal government is now explicitly standing behind 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, another sign of investor relief about the takeover plan

    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.

    The Treasury Department said it was prepared to put up as much as $100 billion over time in each of the companies if needed to keep them from going broke, in exchange for senior preferred stock. Treasury 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 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.

    In a statement, President Bush said, "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."

    Democratic presidential nominee Barack Obama issued a statement agreeing that some form of intervention was necessary, and promised, "I will be reviewing the details of the Treasury plan and monitoring its impact to determine whether it achieves the key benchmarks I believe are necessary to address this crisis."

    Republican presidential nominee John McCain also voiced support while his running mate, Alaska Gov. Sarah Palin, said that Fannie and Freddie "have gotten too big and too expensive to the taxpayers. The McCain-Palin administration will make them smaller and smarter and more effective for homeowners who need help."

    The conservatorship will be run by the Federal Housing Finance Agency, the new agency created by Congress this summer to regulate Fannie and Freddie, a move taken at the same time that Congress greatly expanded the power of the Treasury Department to make loans to the two companies and purchase their stock.

    The executives and board of directors of both institutions are being replaced. Herb Allison, the former head of the TIAA-CREF retirement investment fund, was selected to head Fannie Mae, and David Moffett, a former vice chairman of US Bancorp (USB), was picked to head Freddie Mac.

    Paulson was careful not to blame Daniel Mudd, the outgoing CEO of Fannie Mae, or Freddie Mac's departing CEO Richard Syron for the companies' current problems. While both men are being removed as the top executives, they have been asked to remain for an unspecified period to help with the transition.

    Fannie and Freddie both purchase home loans from banks and then repackage those loans as mortgage-backed securities which they either hold on their own books or sell to investors around the globe. This process provides banks with more money to make more home loans, greatly expanding home ownership.

    The impact of the government takeover on existing common and preferred shares, which have slumped in value in the last year, will depend on how investors react to Paulson's assertion that they must absorb the cost of further losses first. Under the plan, dividends on both common and preferred stock would be eliminated, saving about $2 billion a year.

    After the Treasury Department's announcement, credit rating agency Standard & Poor's downgraded Fannie and Freddie's preferred stock to junk-bond status, but reaffirmed the U.S. government's triple-A rating.

    The Federal Reserve and other federal banking regulators said in a joint statement Sunday that "a limited number of smaller institutions" have significant holdings of common or preferred stock shares in Fannie and Freddie, and that regulators were "prepared to work with these institutions to develop capital-restoration plans."

    The Fed released a letter from Fed Chairman Ben Bernanke to James Lockhart, the director of the Federal Housing Finance Agency, in which the Fed chief said he concurred in Lockhart's decision to take control of Fannie and Freddie saying the action "will help ensure the safe and sound operation of the enterprises."

    Analysts were split on how much the takeover could eventually cost taxpayers although they all agreed the up-front costs will be substantial, possibly hitting $100 billion as the Treasury is called upon to bolster the capital cushions at both institutions.

    However, if the plan does the trick of stabilizing the housing market and home prices stop falling and rebound, then the assets of both Fannie and Freddie 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 given all the headwinds facing housing at the moment from the plunge in home prices to soaring defaults on mortgages which are dumping more homes on an already glutted market. The weak economy has pushed unemployment to a five-year high of 6.1 percent, further reducing demand for homes.

    "I think the government will end up having to put in far more money then 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."

    Under government control, the companies will be allowed to expand their support for the mortgage market over the next year by boosting their holdings of mortgage securities they hold on their books from a combined $1.5 trillion to $1.7 trillion. Starting in 2010, though, they are required to drop their holdings by 10 percent annually until they reach a combined $500 billion.

    In addition, officials said the Treasury Department plans to purchase $5 billion in mortgage-backed securities issued by the two companies later this month, the first of a series of purchases planned by the government in an effort to bolster for these securities, which was badly shaken a year ago when the credit crisis first erupted with soaring defaults on subprime mortgages.

    Paulson said that it would be up to Congress and the next president to figure out the two companies' ultimate structure and the conflicting goals they operated under - maximizing returns for shareholders while also being required to facilitate home buying for low- and moderate-income Americans.

    "There is a consensus today ... that they cannot continue in their current form," he said.

    Members of Congress will be watching in the coming months to see how the takeover works, but more housing legislation appears unlikely until next year given the few weeks remaining both Congress quits to hit the campaign trail.

    Sen. Charles Schumer, D-N.Y. said the intervention was sparked by worries within the Bush administration that foreign governments would stop holding Fannie and Freddie's debt. "This was the prudent course to take," he said.

    Senate Banking Committee Chairman Chris Dodd, D-Conn., announced his committee would hold hearings on the takeover to address a number of unanswered questions so that the American people will know "if this unprecedented proposal will help keep mortgages affordable, stabilize the markets and protect taxpayer interests."

    Lockhart said that all lobbying activities of both companies would stop immediately. Both companies over the years made extensive efforts to lobby members of Congress in an effort to keep the benefits they enjoyed as government-sponsored enterprises.

    Sunday's actions followed a series of meetings Paulson had with Bush and other top administration economic officials with Bush relying heavily on the judgment of Paulson, who was the head of investment giant Goldman Sachs before he joined the Cabinet in 2006.

    "It is really an assent to Hank's direction, guidance and judgment," said a senior administration official, who spoke on condition of anonymity to discuss behind-the-scenes deliberations.
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  2. #2
    Forum Frontman It's Mike's Avatar
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    a necessary and very wise move by President Bush. Not sure if I've ever typed those words before.

  3. #3
    Atomic Punk Dave's Dreidel's Avatar
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    I live in the Capitol area and am a CPA by trade, and I have done quite a few tax returns for executives in Fannie and Freddie.

    What makes me mad is that executives who were not even top level management were making millions of dollars off of stock options while times were good. Now that the mortgage market has turned, you and I are now going to bail out the mess through our tax dollars yet these executives still have the millions they made.

    Don't get me wrong, I want everyone to make as much money as they possibly can, but doing so with implied government backed guarantee doesn't sit right with me.

    I agree that it had to be done, but in my very humble opinion quasi government agencies should not be allowed to become publicly traded companies.
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  4. #4
    Forum Frontman It's Mike's Avatar
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    Quote Originally Posted by Dave's Dreidel View Post
    I live in the Capitol area and am a CPA by trade, and I have done quite a few tax returns for executives in Fannie and Freddie.

    What makes me mad is that executives who were not even top level management were making millions of dollars off of stock options while times were good. Now that the mortgage market has turned, you and I are now going to bail out the mess through our tax dollars yet these executives still have the millions they made.

    Don't get me wrong, I want everyone to make as much money as they possibly can, but doing so with implied government backed guarantee doesn't sit right with me.

    I agree that it had to be done, but in my very humble opinion quasi government agencies should not be allowed to become publicly traded companies.
    Fannie Maes and Freddie Macs have an implied guarantee - corporations around the world buy these and rate them as they do US gov't securities. The US gov't could simply not allow them to go under.

    I agree with the rest of your post completely - you can't, as management, be treated like a private entreprise when times are good and not take the fall when times are bad.

  5. #5
    Atomic Punk ZeoBandit's Avatar
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    I'm so glad we got rid of my wife's house. Hopefully now the housing market will stabilize before we have to sell our current house and find a bigger one.
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  6. #6
    Sinner's Swing!
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    Quote Originally Posted by ZeoBandit View Post
    I'm so glad we got rid of my wife's house. Hopefully now the housing market will stabilize before we have to sell our current house and find a bigger one.
    I bought a house in Arizona in 2005, so you can imagine where I'm at with value on it. I'm very lucky with a good paying job with a huge demand, so I'll be OK. But at the same time, kinda stink that I can't qualify for any of these assistance programs that have come along, and now my tax dollars are going to bail out these mortgage companies. At the same time, I understand why they are doing it, you can't let them go under.

  7. #7
    Baluchitherium Guitar Shark's Avatar
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    Quote Originally Posted by seenbad View Post
    "Effectively, the federal government has now become the nation's mortgage lender," he said. "This takes a major financial threat off the table."
    Interesting that this happened during a Republican administration.

  8. #8
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    The Underpinnings of the Housing Scandal


  9. #9
    Baluchitherium mistere's Avatar
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    It will all be Obama's fault in 4 mos. Or "Bob Barr's.

  10. #10
    Damage your reputation seenbad's Avatar
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    Quote Originally Posted by Guitar Shark View Post
    Interesting that this happened during a Republican administration.
    It just further blurs the lines. I thought the same thing.

    Small gov't is just a smoke and mirrors term. Right means middle.

    I need a new party or independent to represent me. Neither of these two do it.
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  11. #11
    Baluchitherium loveevhsince79's Avatar
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    Quote Originally Posted by seenbad View Post
    Small gov't is just a smoke and mirrors term. Right means middle.

    I need a new party or independent to represent me. Neither of these two do it.
    Isn't that the truth!!
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  12. #12
    Future's in the past....
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    Quote Originally Posted by seenbad View Post
    It just further blurs the lines. I thought the same thing.

    Small gov't is just a smoke and mirrors term. Right means middle.

    I need a new party or independent to represent me. Neither of these two do it.

    Could not agree more!
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  13. #13
    Atomic Punk edwardv's Avatar
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    Iam not a fan of the US Govt bailing out anyone but financial institutions such as banks or brokerages in which many many mutual funds are invested in, which could result in a recession or even a depression not to mention your401Ks which are the mainstay of most folks retirement with the demise of pensions. Now Iam also in favor of the US gov sending anyone to jail that caused a financial firm to go under if there were unlawful activities involved. You have to do both but Iam afraid the latter is by selected choice.

  14. #14
    Atomic Punk
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    The words "Temporary Fix" and "Stop-gap" come to mind.

    There are some very big shoes out there yet to drop but these are the two largest so far.

    I thought that you had to be smart to run a financial institution.
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  15. #15
    Forum Frontman It's Mike's Avatar
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    Quote Originally Posted by Axxman300 View Post
    The words "Temporary Fix" and "Stop-gap" come to mind.

    There are some very big shoes out there yet to drop but these are the two largest so far.

    I thought that you had to be smart to run a financial institution.
    I think most of the biggest shoes have hit the ground Axx. Many institutions may have actually taking a "big bath" (been overly conservative with their writeoffs) in recent quarters in order to make future quarterly profits look even better.

    Greed almost always overpowers smarts.

 

 

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