The U.S. government is likely to decide within 18 months that Fannie Mae and Freddie Mac need to be wound down and replaced with a similar entity that would support U.S. housing, Moody’s Investors Service said.
The government-chartered mortgage-finance companies, which were seized by regulators in September 2008 and since have used $85.7 billion of their capital lifelines, face mounting losses that will mean “it could take a decade or longer” before they are able to emerge from U.S. control as “viable standalone entities,” the New York-based ratings company said in a report.
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The increasing losses that will be caused in part by government efforts to use Washington-based Fannie Mae and Freddie Mac of McLean, Virginia as tools to stem the housing slump, as well as the probability it will be “politically untenable to resurrect” the firms, mean the U.S. will likely create a new organization that won’t be owned by shareholders to play a similar role in the economy, Moody’s said.
“This is not bad news for Fannie Mae and Freddie Mac bondholders as the U.S. government has become entwined with these companies and the creation of a new entity to support housing finance likely means the orderly conclusion of Fannie Mae and Freddie Mac,” Brian L. Harris, Craig A. Emrick and Robert Young, Moody’s analysts, wrote in the report yesterday.
Moody’s rates the companies’ senior debt Aaa because of their “very strong” government support, the report said. The companies can tap up to $200 billion of taxpayer capital, and can turn to an emergency financing facility at the U.S. Treasury through at least yearend. The Federal Reserve is buying as much as $1.45 trillion of the debt and mortgage securities through yearend in an effort to lower home-financing costs.
The companies own or guarantee about $5.3 trillion of the $12 trillion in U.S. residential mortgage debt. A Treasury report in June said the Obama administration “will engage in a wide-ranging process and seek public input to explore options regarding the future” of Fannie Mae and Freddie Mac and will deliver a report to Congress when the president gives his fiscal 2011 budget in February.
