Fannie and Freddie: why the takeover
Treasury said Sunday the mortgage giants will enter a conservatorship.
By taking control of Fannie Mae and Freddie Mac, the Bush administration has launched a high-stakes bid to bolster the housing market and the US economy – seeking to minimize costs to taxpayers even as it puts them on the hook.Skip to next paragraph
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Treasury Secretary Henry Paulson on Sunday announced a federal conservatorship for the two mortgage giants, which play a key role in the housing market, now rocked by falling home values and high rates of foreclosure.
The action begins a formal Treasury role that, just a few weeks ago, Secretary Paulson said he expected to avoid. Fannie and Freddie, as private companies created by government mandate, have long been seen as implicitly backed by the Treasury. Now that backstop is as explicit as it can be.
Why is it coming to this?
The short answer is that legislation Congress passed in July failed to reassure financial markets enough to position the two companies to raise needed capital on their own. That law gave the Treasury new authority to funnel credit or capital into Fannie and Freddie, if needed – at taxpayer expense.
Meanwhile, foreclosures continue to pummel the mortgage firms with big losses.
The two companies will now operate, as they open their doors Monday, under the authority of the Federal Housing Finance Agency (FHFA), a new agency that Congress created this summer to regulate Fannie and Freddie.
Paulson announced the conservatorship along with James Lockhart, the FHFA's director. He outlined three key goals: ensuring market stability, continuing the availability of mortgages, and holding taxpayer costs to a minimum.
Those goals, he said, could not have been achieved by simply pumping federal money into the two companies in their present form.
An impetus for Sunday's move is what Paulson described as ambiguity in the identity of the two so-called government-sponsored enterprises (GSEs). For years they have operated with both a public mission – to foster broad and stable mortgage markets – and a private one of providing profits for shareholders.
The goal of maximizing shareholders' returns, Paulson said, has "encouraged risk-taking."
Given the plunge in share value at the GSEs during the past year, the worry was that their managers might have been tempted to take on more risk in an effort to recover.
"The shareholders have nothing to lose and everything to gain" if Fannie and Freddie's CEOs were to take new risks now, because the current share price is so low, says Morris Davis, a University of Wisconsin economist who focuses on real estate issues.