US govt 'to take over mortgage giants'

US mortgage giants Fannie Mae and Freddie Mac are expected to be taken over by the government as early as this weekend, it emerged today.

The bold move is designed to protect the mortgage market from the risk that the companies could fail, a person briefed on the matter said.

Some of the details of the intervention, which could cost US taxpayers billions, were not yet available, but are expected to include the departure of Fannie Mae chief executive Daniel Mudd and Freddie Mac’s chief Richard Syron, according to the source, who asked not to be named because the plan was yet to be announced.

US Federal Reserve chairman Ben Bernanke, treasury secretary Henry Paulson and James Lockhart, the companies’ chief regulator, met yesterday 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 website, came after stock markets closed. In after-hours trading Fannie Mae’s shares plunged $US1.70 (€1.20), or 24%, to US$5.34 (€3.74). Freddie Mac’s shares fell 95 cents, almost 19%, to US$4.15 (€2.91).

The news also followed a report by the Mortgage Bankers Association that more than four million American homeowners with a mortgage, a record 9%, were either behind on their payments or being repossessed 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$3.1bn (€2.17bn) between April and June. Half of their credit losses came from these types of risky loans with ballooning monthly payments.

While both companies say 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 had not expected Mr Paulson to intervene unless the companies had trouble issuing debt to fund their operations.

This summer, Congress passed a plan to provide unlimited government loans to Fannie and Freddie and to purchase stock in the two companies if needed.

Critics say the open-ended nature of the rescue package could expose taxpayers to billions of dollars of potential losses.

Supporters, however, argue the Bush administration had little choice but to support Fannie and Freddie, which together hold or guarantee US$5trillion (€3.5tn) in mortgages – almost half the nation’s total.

Representatives of Fannie and Freddie would not comment on the government assistance plan.

Treasury spokeswoman Brookly McLaughlin said officials “have been in regular communications” with Fannie and Freddie, but refused to comment on the story, saying, “We are not going to comment on rumours.”

Concern has been growing that a government rescue of Fannie and Freddie could 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

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.