US government to take over Fannie Mae, Freddie Mac (Roundup)

Sep 6, 2008, 6:00 GMT

Washington - The US government was preparing to take over the twin mortgage finance giants known as Fannie Mae and Freddie Mac, dismiss their top executives and prop up the companies with government funds, media reports said late Friday.

The Washington Post and New York Times quoted unnamed officials and company executives briefed on the plan as saying the move could come over the weekend, possibly by Sunday.

The move appeared to be based on a law passed by the US Congress in early August which also shored up other aspects of the faltering US mortgage market that has been undermined by record foreclosures.

Treasury Secretary Henry Paulson on Friday met with executives of the two companies and regulators along with Federal Reserve chairman Ben Bernanke and Federal Housing Finance Agency (FHFA) director James Lockhart in Washington, Bloomberg financial news agency reported.

The chief executives of the two companies were summoned and told that they and their boards would be replaced, the Times reported.

The two companies have suffered 14.9 billion dollars in losses from the widening mortgage foreclosure crisis in the US that has rippled outward to foreign investors. The central banks of many countries, including those in Asia, hold considerable stock in Fannie and Freddie, Bloomberg reported.

Bloomberg reported that catered food was scheduled for delivery through the weekend to the FHFA, indicating intense talks were scheduled. Congressional leaders were reported to be on standby for briefings over the weekend, with a possible plan to be released to the public by Saturday or Sunday.

The two companies would be placed in a conservatorship, the Times and Post reported. Such a move could either deal another blow to US finance markets as the country struggles with soaring mortgage foreclosures or restore confidence to investors.

Shareholders in Freddie Mac and Fannie Mae would lose most of their investment, with taxpayers carrying any remaining guaranteed worth, the newspapers said. But the Post reported that while common stock could be diluted in value, company debt and preferred shares could be protected by the government.

Fannie and Freddie common stock was valued at nearly 100 billion dollars at the end of 2007, but has dropped to about 10 billion dollars, the Times reported. The common stock is held by individuals, pension funds and mutual funds.

In August, Fannie Mae reported a second quarter loss of 2.3 billion dollars, marking the fourth straight quarter of losses for the US bank. The company recorded a 1.86-billion-dollar gain in the same period a year ago.

The number of new mortgage holders entering foreclosure in the second quarter stood at 1.19 per cent of all US mortgages, the Mortgage Bankers Association said Friday, the first time the rate has topped 1 per cent in the 29-year-history of the association's record keeping.

Fannie and Freddie together manage nearly half of the 12-trillion- dollar US mortgage market.

Last month's new law approved an emergency plan for the twin lenders that appeared to form the legal basis for a government takeover. At the time, government officials warned that their collapse could plunge the US into a far deeper crisis.

The unprecedented rate of foreclosures around the country has forced financial firms to write off nearly 500 billion dollars in mortgage-related assets since August 2007.

In early August, a total of 1.5 million properties were facing foreclosure or were bank-owned, according to RealtyTrac. Bank repossessions accounted for 30 per cent of all foreclosure filings in the second quarter, up from 24 per cent in the first quarter.

Defaults on subprime mortgages - loans to people with a poor credit history - have been at the heart of the US housing crisis, and the higher bank repossessions suggested the market was slowly 'purging the problem loans' before stabilizing, James Saccacio, chief executive officer of Realty Trac, said at the time.

He warned that a second 'surge' in mortgage defaults was possible in the second half of the year, which could 'refill the foreclosure pipeline and prolong the recovery.'

The bill passed in August also allowed up to 400,000 mortgage- holders to refinance into low-interest government loans - effectively guaranteeing 300 billion dollars worth of new mortgages.

News in July of Fannie and Freddie's troubles send worldwide markets plunging, as the government acted to protect the mortgage firms in a rapid weekend move to guarantee their debts. The two companies are chartered by the federal government but have publicly traded shares.