The federal government is taking over troubled mortgage firms Freddie Mac and Fannie Mae, announcing historic plans Sunday morning to stabilize the slumping companies.
The plan, a joint effort by the Department of the Treasury and Federal Housing Finance Agency, will leave the latter agency in charge of the two firms’ day-to-day operations. The Treasury will purchase roughly 80 percent of the firms and will also purchase mortgage-backed securities in the open market.
Treasury Secretary Henry Paulson said assisting Fannie Mae and Freddie Mac is “critical to turning the corner on housing.” The two firms own or guarantee more than $5 trillion in U.S. home loans, about half of the country’s outstanding loans.
“These two institutions are unique,” Paulson said in a statement. “They operate solely in the mortgage market and are therefore more exposed than other financial institutions to the housing correction.”
The government’s move is one of the most extraordinary, hands-on bailouts of a company in U.S. history said Peter Morici, a professor of finance at the University of Maryland and former chief economist of the U.S. International Trade Commission.
“In the last few years they have required smaller and smaller down payments and taken on riskier borrowers,” Morici said of Freddie Mac and Fannie Mae. “They haven’t been as bad as the commercial banks but they’ve committed some of the same sins, just not to the same degree.”
Paulson and James Lockhart, director of the Federal Housing Finance Agency, stressed that their actions were designed to strengthen the role of the two mortgage giants in supporting the nation’s housing market. Both companies do that by buying mortgage loans from banks and packaging those loans into securities that they either hold or sell to U.S. and foreign investors.
The huge potential liabilities facing each company, as a result of soaring mortgage defaults, could cost taxpayers tens of billions of dollars, but Paulson stressed that the financial impacts if the two companies had been allowed to fail would be far more serious.
“A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance,” Paulson said.
Daniel Mudd and Richard Syron, CEOs of Fannie Mae and Freddie Mac, respectively, will be removed, and replaced with Herb Allison, a former vice chairman of Merrill Lynch and David Moffett, a former vice chairman of US Bancorp, respectively.
Morici said he believed the federal government’s move would be successful, with its backing of mortgage-based securities restoring investors’ confidence. But he stressed that Congress members will have to avoid using their new control over home loans as a political battleground.
“It’s not hard to restore these companies’ viability,” he said. “Now Congress will have to show some restraint.”
The Associated Press contributed to this story.
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