online.wsj.com/article/SB122079276849707821.html
MORE US Outlines Fan-Fred Takeover September 7, 2008 3:04 pm James R Hagerty and Ruth Simon The US government, increasingly alarmed by a housing slump that threatens to pull down the whole economy, is taking over the business of ensuring that funding is available for home mortgages.
Freddie Mac, and puts the two companies under management control of their regulator, the Federal Housing Finance Agency, or FHFA. Treasury Secretary Henry Paulson said the moves will increase the availability of credit for home buyers.
Associated Press Treasury Secretary Henry Paulson speaks during a news conference on the bailout of mortgage giants Fannie Mae and Freddie Mac The Treasury also plans to buy an unspecified amount of mortgage-backed securities issued by Fannie and Freddie in an effort to bring down borrowing costs for home buyers. Despite steep interest-rate cuts by the Federal Reserve, the cost of a typical 30-year fixed-rate mortgage has remained well over 6% for most of the past year. The moves are likely to nudge down interest rates for consumers and help prevent a worsening of what is already the worst housing bust since the 1930s. At least in the short run, the actions also further entrench the government in a mortgage industry, leaving taxpayers exposed to default-related losses that could run into the scores of billions. In the longer run, Mr Paulson aims to drastically shrink the amount of mortgages and related securities held by the companies, but he noted it will be up to Congress and future administrations to decide what shape Fannie and Freddie ultimately take. Mr Paulson said the government had no choice other than to prop up Fannie and Freddie, companies created by Congress to support the housing market but owned by private shareholders. The more than $5 trillion of debt and mortgage-backed securities issued by the companies is owned by central banks and other investors world-wide. "A failure of either of them would cause great turmoil in our financial markets here at home and around the globe," Mr Paulson said. James Lockhart, director of the FHFA, said the regulator seized management control of the companies because their ability to cope with heavy losses was "in doubt," given their small cushions of capital and inability to raise further money from private sources. The conservatorship will last indefinitely as the regulator tries to nurse the companies back to financial health. Mr Lockhart appointed a new chief executive officer for each company but said he hopes to keep most other employees in place. At Fannie, Herb Allison, who has served for the past eight years as chairman of the investment company TIAA-CREF, succeeds Daniel Mudd.
All lobbying by the companies, which were long renowned for their ability to influence Congress, "will be halted immediately," Mr Lockhart said. The regulator will eliminate common and preferred stock dividends, saving a total of $2 billion a year for the companies. To ensure that the companies don't run out of capital, the Treasury agreed to acquire $1 billion of senior preferred stock from each company immediately. In addition, the Treasury will stand ready to acquire as much as $100 billion of preferred stock in each company, though it said it doesn't expect them to need that much capital. The Treasury also announced an arrangement under which it will stand ready to make short-term loans to Fannie, Freddie and the 12 regional Federal Home Loan Banks, privately owned cooperates that were created by Congress to help banks fund housing. The borrowings would be backed by mortgage securities or other approved collateral and bear interest at 050 percentage point above the London interbank offered rate, or Libor, a measure of the fees banks charge one another for short-term loans. Under normal conditions, Fannie and Freddie typically can borrow money for less than Libor, but these Treasury loans would be a backstop. Mr Paulson signals that he wants to remake the US housing-finance system in the longer term, ditching the "flawed business model" of government-sponsored enterprises like Fannie and Freddie. This model has produced conflicts between the companies' desire to earn maximum profits for their shareholders and the public mission of supporting housing that has persuaded investors that the government would have to rescue them in a crisis. The plan limits the size of each companies' mortgage portfolios to a maximum of $850 billion as of the end of 2009. After that, the Treasury intends for the mortgage holdings to shrink about 10% a year until they reach about $250 billion at each company. But that is subject to decisions that may be made by Congress and future administrations. The government had to wade deeper into the mortgage market because for now "private markets are just not willing to put up the capital" for home mortgages at prices US consumers could afford, said Susan Wachter, a professor of real estate and finance at the University of Pennsylvania's Wharton School. Without government support for the mortgage market, home prices would fall much farther, exposing the country as a whole to greater economic strain, Ms Wachter says. Mr Frank said the companies' ultimate size, scope, and mission will be something that won't be addressed for at least six or 12 months, when the next Congress and the next White House are in control. He said policy makers will look closely at the future of the companies and their conflicting public/private mission next year as part of a huge overhaul of financial regulation. Fannie and Freddie got into trouble largely because they embraced riskier types of loans just as the housing market was starting to crumble in 2006 and 2007 in an effort to regain from Wall Street rivals a bigger share of the mortgage market. As those loans started to go bad, the companies began recording big losses in the second half of last year. They then failed to raise enough capital late last year, when investors were still fairly bullish on their prospects, to see them through the current storm. The companies have recorded combined losses totaling about $14 billion over the past four quarters, eating deeply into their meager capital holdings, and most analysts expect them to report sizable losses for at least another couple of years as the costs of foreclosures mount. In recent months, they have backed more than 70% of new home mortgages, while the Federal Housing Administration, a government agency, has insured most of the rest, according to Inside Mortgage Finance, a trade publication. The bulk of US home loans are packaged into securities and sold to investors. Fannie, Freddie and the FHA have dominated the market since mid-2007, when investors lost faith in mortgage securities other than those backed by those government-linked entities. "When the panic is on, everybody wants a government guarantee," says Alex Pollock, a resident fellow at the American Enterprise Institute, a Washington think tank. Fannie and Freddie's credit problems are largely a reflection of the overall weakness in the housing market. Some 92% of mortgages on one-to-four family homes were at least a month overdue or in the foreclosure process in the second quarter, according to the latest survey of the Mortgage Bankers Association. That is the highest percentage in the 39 years that the trade group has been doing the surveys. But both companies made things worse by loosening their standards and accepting riskier types of loans. Fannie and Freddie's credit losses are being driven primarily by loans made in 2006 and 2007, when lending standards were loosest; by mortgages made to borrowers who fell outside their traditional lending standards, and by heavy exposure to loans in such areas as California and Florida where home prices have fallen most sharply. Loans made in 2006 and 2007 account for 65% of second-quarter credit losses at Freddie Mac and nearly 60% of those losses at Fannie Me, according to company estimates. "Business they thought were prime is turning out not to be prime because of limited documentation of income and declining home prices," said Guy Cecala, publisher of Inside Mortgage Finance. As ea...
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