The US government is considering a plan to take over mortgage giants Fannie Mae and Freddie Mac if their finance problems deepen, US media reported yesterday.
Citing people briefed on the plan, the New York Times said the administration of US President George W. Bush was weighing the possibility of having to place one or both companies in a conservatorship to protect them from the snowballing collapse of the US mortgage finance market.
“The officials involved in the discussions stressed that no action by the administration was imminent, and that Fannie and Freddie are not considered to be in a crisis situation,” the Times reported.
However, it said that the two companies, by far the largest home loan financers in the US with US$5.2 trillion in mortgages or mortgage guarantees on their books, faced weakening balance sheets as their stocks plummet and their borrowing costs sour in the face of doubts about their health.
The Times said an alternative intervention strategy, having the government guarantee the US$5 trillion of debt the two companies own or themselves guarantee, was seen as less attractive, because it would have the effect of doubling US public debt.
The Wall Street Journal, which first reported on Thursday that the Bush administration was weighing strategies to keep the firms afloat, said yesterday that pressure was on them now to raise fresh capital.
Under a 1992 law, if either is seen as being severely undercapitalized, it would have to be placed into government conservatorship.
The two shareholder-owned firms, which have no explicit government backing despite their government charter, provide liquidity to the housing market by buying mortgages and repackaging them in securities sold to investors.
Freddie Mac has a loan portfolio of US$1.5 trillion and Fannie Mae’s is over US$700. Together they own or guarantee about 40 percent of the total value of home loans in the US.
US Treasury Secretary Henry Paulson said on Thursday that the two companies are “adequately capitalized.”
Speaking to the House Committee on Financial Services, Paulson said Fannie Mae and Freddie Mac were “working through this challenging period” of the housing slump, which has seen billions of dollars’ worth of mortgages and mortgage-backed securities collapse in value.
At the same hearing, US Federal Reserve Chairman Ben Bernanke said the government-sponsored firms “are well capitalized now in ... a regulatory sense.”
But Bernanke added that all financial institutions needed to expand their capital bases so that they can be “even more proactive in providing credit and support for the economy.”
Fred Dickson, analyst at DA Davidson & Co, said Fannie Mae’s sale this week of US$3 billion in notes marked “a record spread versus US Treasury notes, indicating the reluctance of buyers to fund the troubled mortgage lender.”
That, he said, could jeopardize its AAA credit rating.
Peter Schiff at Euro Pacific Capital said the two giants were likely to need government bailouts.
“Together both firms have less than US$90 billion in capital reserves to insure losses on more than US$5 trillion in mortgage debt,” he said.
“Could anyone reasonably believe that a 2 percent reserve fund can cover all the losses that are likely to be seen? ... Clearly, Fannie and Freddie would have no ability to survive without a government bailout,” Schiff said.
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