Fannie Mae and Freddie Mac are expected to be taken over by the government as soon as this weekend in a bold move designed to protect the mortgage market from the risk the companies could fail, a person briefed on the matter said on Friday night.
Some of the details of the intervention, which could cost taxpayers billions, were not yet available, but were expected to include the departure of Fannie Mae CEO Daniel Mudd and Freddie Mac CEO Richard Syron, according to the source, who asked not to be named because the plan had not yet been announced.
US Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson and James Lockhart, the companies’ chief regulator, met on Friday afternoon with the top executives from the mortgage companies and informed them of the government’s plan to take over the troubled companies in a process known as conservatorship.
The news, first reported on the Wall Street Journal’s Web site, came after stock markets closed. In after-hours trading Fannie Mae’s shares plunged US$1.70, or 24 percent, to US$5.34. Freddie Mac’s shares fell US$0.95, or almost 19 percent, to US$4.15.
The news also followed a report by the Mortgage Bankers Association that more than 4 million US homeowners with a mortgage, a record 9 percent, were either behind on their payments or in foreclosure at the end of June.
That confirmed what investors saw in Fannie and Freddie’s recent financial results: trouble in the mortgage market has shifted to homeowners who had solid credit but took out exotic loans with little or no proof of their income and assets.
Fannie Mae and Freddie Mac, the nation’s largest buyers and backers of mortgages, lost a combined US$3.1 billion between April and June. Half of their credit losses came from risky loans with ballooning monthly payments.
While both companies have said they have enough resources to withstand the losses, many investors believe their financial cushions could wither away as defaults and foreclosures mount.
Still, many in Washington and on Wall Street hadn’t expected Paulson to intervene unless the companies had trouble issuing debt to fund their operations.
This summer, the US Congress passed a plan to provide unlimited government loans to Fannie and Freddie and to purchase stock in the two companies if needed.
Representatives of Fannie and Freddie declined to comment on the government assistance plan.
Treasury spokeswoman Brookly McLaughlin said officials “have been in regular communications” with Fannie and Freddie, but refused additional comment on the story, saying: “We are not going to comment on rumors.”
Concern has been growing that a government rescue of Fannie and Freddie would not only wipe out common stockholders, but also be costly for scores of investment, banking and insurance companies that hold billions of dollars in their preferred shares. The firms had nearly US$36 billion in preferred shares outstanding as of June 30.
Fannie Mae was created by the government in 1938 and was turned into a shareholder-owned company 30 years later. Freddie Mac was established in 1970 to provide competition for Fannie.
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