US govt considers Freddie and Fannie takeover

11-07-2008

US govt considers Freddie and Fannie takeover
The US government is considering taking over mortgage providers Freddie Mac and Fannie Mae if their funding problems get worse.

Shares in both groups plunged when the possibility was reported in the New York Times on Friday.

If the government were to take over, the shares would be effectively worthless and losses on their home loans would be taken on by the taxpayer.

The two groups are government-sponsored entities that provide funding for mortgage lenders rather than lend directly.

Between them, they own or guarantee about half of the $12 trillion (£6 trillion) of US mortgages held.

Although neither company has any guarantee of being bailed out by the US government as they are both private corporations, there is a widespread belief that the government would not let them fail.

The Office of Federal Housing Enterprise Oversight has tried to calm investors' fears and said both Fannie and Freddie remain "adequately capitalized" and "have large liquidity portfolios, access to the debt market and over $1.5 trillion (£750 billion) in unpledged assets."

But in premarket trading today, shares in Freddie Mac dropped 35 per cent and shares of Fannie Mae tumbled 27 per cent.

Under a 1992 law, the government can take them into a 'conservatorship' if their capital falls below a 'critical' level.

Fannie Mae was created after the Depression to pump liquidity into the mortgage market, while Freddie Mac was founded in 1970 to expand the secondary market.

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