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Government considering future of mortgage giants Fannie Mae, Freddie Mac

Sat., July 12, 2008

WASHINGTON – Senior government officials prepared emergency steps Friday to rescue troubled mortgage giants Fannie Mae and Freddie Mac but stopped short after a campaign of public statements eased immediate concerns about the stability of the institutions.

But federal regulators were forced Friday to seize California-based IndyMac Bancorp after a run by depositors led to the second-largest failure ever of a U.S. financial institution. The bank, which was taken over by the Federal Deposit Insurance Corp., became the first major bank to shutter its doors since the savings and loan crisis of the early 1990s. One of the country’s largest home lenders, IndyMac saw its holdings battered by the downturn in the housing market.

Similar troubles have buffeted Fannie Mae and Freddie Mac as anxiety has risen about whether the companies have enough capital to cover their mounting obligations because of troubled mortgages. With the companies’ stock value draining away in recent days, Treasury Department and Federal Reserve officials have been discussing several dramatic options, including allowing the companies to swap some of their holdings in troubled securities for public money as well as accessing government loans, according to government officials and others informed about the measures. Fannie Mae and Freddie Mac might also be allowed to tap an expanded line of credit from the Treasury.

Such actions would be the first explicit statement by the government that it stands behind the two companies though investors have long considered a federal guarantee to be implicit. That recognition alone could prove more valuable than the cash.

Some of the measures being considered bear a striking resemblance to the lifeline federal regulators extended to Wall Street’s biggest banks earlier this year in an effort to head off a global financial crisis and underscore the peril posed by the potential failure of either Fannie Mae or Freddie Mac.

The Treasury has been developing contingency plans along these lines since at least 2006 but has done far more extensive work – and with more urgency – in the past two weeks as Fannie Mae’s and Freddie Mac’s problems have deepened.

These steps are an effort to prevent a full federal government takeover of the companies, which could occur if they are deemed insolvent. Such an arrangement, called conservatorship, would mean that taxpayers would have to cover the potentially tremendous losses on any mortgages the companies own or guarantee.

In recent months, Fannie Mae’s and Freddie Mac’s role in underpinning the housing market has grown as other financial institutions have fled the credit markets. The companies, chartered by the federal government to keep funds flowing to mortgage lenders, pool mortgages into securities for sale to investors. Fannie Mae and Freddie Mac pledge they will cover the payments if borrowers default, and they also buy and hold their own mortgage investments.

Together, they bought about two-thirds of the single-family-home mortgages that originated from January to March of this year, according to their regulator, the Office Federal Housing Enterprise Oversight.

But the companies face questions from investors about whether they have enough capital to cover their obligations, and a loss of faith in them could make it impossible to raise more money.

Friday morning, the share prices of both companies fell by about 50 percent, with Freddie Mac trading at $3.89 at one point. After all the public statements, however, the shares of both companies regained some of the lost ground. Freddie Mac finished the day down 3.1 percent, and Fannie Mae was off 22.4 percent.

Freddie Mac’s stocks have now tumbled 88 percent since their high in 2006, and Fannie Mae’s shares are off 85 percent since their recent peak last year.

Throughout the day Friday, top-ranking government officials waged a concerted campaign to defuse worries about the future of the two mortgage companies while Wall Street analysts and other outsiders sent messages to each other suggesting that government intervention might be at hand.

Treasury Secretary Henry Paulson began the day by calling senior members of Congress, including key Democrats such as Senate Banking Committee Chairman Christopher Dodd, D-Conn., House Financial Services Committee Chairman Barney Frank, D-Mass., and Sen. Charles Schumer, D-N.Y., to assure them that the companies were in good shape and that if action were needed to shore them up, the government would take it.

Paulson then put out a public statement rejecting the idea of a government takeover. “Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission,” he said.

At the same time, he kept open the possibility that the government would act if needed. “We are maintaining a dialogue with regulators and with the companies,” he added.

This public campaign was stepped up later in the day when Paulson and President Bush addressed the cameras at the Energy Department. The president said that Fannie Mae and Freddie Mac were “very important institutions” and that Paulson had assured him that he and Bernanke would be “working this issue very hard.”


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