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Fannie & Freddie Heading for "Conservatorship"

Friday, July 11, 2008 | 06:00 AM

in Credit | Real Estate | Taxes and Policy

This was originally posted Thursday evening 07-10-2008 at 10:33 PM, but since it obviously resonated with so many people, I am moving this to Friday morning. Some great comments, too.

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Gee, that didn't take long:

"Alarmed by the growing financial stress at the nation’s two largest mortgage finance companies, senior Bush administration officials are considering a plan to have the government take over one or both of the companies and place them in a conservatorship if their problems worsen, people briefed about the plan said on Thursday.

The companies, Fannie Mae and Freddie Mac, have been hit hard by the mortgage foreclosure crisis. Their shares are plummeting and their borrowing costs are rising as investors worry that the companies will suffer losses far larger than the $11 billion they have already lost in recent months. Now, as housing prices decline further and foreclosures grow, the markets are worried that Fannie and Freddie themselves may default on their debt.

Under a conservatorship, the shares of Fannie and Freddie would be worth little or nothing, and any losses on mortgages they own or guarantee — which could be staggering — would be paid by taxpayers.

The government officials said that the administration had also considered calling for legislation that would offer an explicit government guarantee on the $5 trillion of debt owned or guaranteed by the companies. But that is a far less attractive option, they said, because it would effectively double the size of the public debt."

Bloomberg adds:

"The government-chartered companies, which own or guarantee about half the $12 trillion of U.S. mortgages, can count on a federal lifeline, said Republican Senator John McCain, of Arizona, and Democratic Senator Charles Schumer, of New York.

The remarks by the presumptive Republican presidential candidate and the head of the congressional Joint Economic Committee followed a slide in the firms' shares to the lowest level since 1991. They indicate Congress would push the administration to use government funds to prevent the companies from failing and threatening a deeper housing recession."

I smell an ugly, taxpayer-funded bailout coming -- and I am utterly aghast at what its going to cost . . .

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Sources:
U.S. Considers Takeover of Two Mortgage Giants
STEPHEN LABATON and STEVEN R. WEISMAN
NYT, July 11, 2008
http://www.nytimes.com/2008/07/11/business/11fannie.html

Fannie, Freddie Are Too Big to Fail, Lawmakers Say
Dawn Kopecki
Bloomberg, July 10 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=avnMyKESZ2qk&