The US government took control of twin mortgage giants Fannie Mae and Freddie Mac yesterday as it unveiled a series of measures designed to rescue the beleaguered US housing market.
Treasury secretary Henry Paulson said the Federal Housing Finance Agency (FHFA) would place Fannie Mae and Freddie Mac under “conservatorship” to prevent the collapse of the institutions, which guarantee around 50 per cent of US home loans, worth $5.3 trillion, or twice the size of the UK economy.
The Treasury will establish a secured lending credit facility to help government-sponsored enterprises (GSEs) “fund their regular business activities in the capital markets”. And it will take an equity stake in the two firms through senior preferred equity shares and warrants.
The Treasury will also implement a temporary programme to buy mortgage backed securities from GSEs, in order to pour new funds into the mortgage markets. The management of the two firms will also move aside as the FHFA steps into manage them itself.
Paulson said the moves would increase market stability, improve mortgage availability and afford taxpayers protection from a collapse of the two GSEs, which have suffered combined losses of nearly $14bn in the last year and have $1.6 trillion in outstanding debt.
Federal Reserve chairman Ben Bernanke said: “These necessary steps will help to strengthen the US housing market and promote stability in our financial markets.”
The stock of the two companies has fallen more than 90 per cent in the past year.
Paulson had briefed both Democratic presidential nominee Sen. Barack Obama and Republican contender Sen. John McCain earlier in the weekend. Both candidates said they would support the plan, but wanted to ensure taxpayers were safeguarded and shareholders and management took a hit.