Frontier Former Editor

September 7, 2008

Great news from the U.S. Treasury Department!

“Sept. 7 (Bloomberg) — The U.S. government will take control of Fannie Mae and Freddie Mac after the biggest surge in mortgage defaults in at least three decades threatened to bring down the companies making up almost half the U.S. home-loan market.

“It is necessary to take action,” Treasury Secretary Henry Paulson, who engineered the takeover along with Federal Housing Finance Agency Director James Lockhart, said in a statement today. “Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner on housing.”

The FHFA will take over Fannie and Freddie under a so-called conservatorship, replacing their chief executives and eliminating their dividends. The Treasury will purchase up to $100 billion of senior-preferred stock in each company as needed to maintain a positive net worth. It will also provide secured short-term funding to Fannie, Freddie and 12 federal home-loan banks, and purchase mortgage-backed debt in the open market.

The takeover of Fannie and Freddie is the biggest step yet in officials’ efforts to grapple with a yearlong credit crisis that has caused more than $500 billion of losses and writedowns. The government is taking an increasing role in financial markets, after the Federal Reserve six months ago provided $29 billion of financing to prevent Bear Stearns & Cos.’s collapse.”

Sucks to be those who didn’t own senior preferred stock or who are U.S. taxpayers, but George W. Bush thanks you for your sacrifice for the greatest nation in the world!

1 Comment »

  1. Well this is what you get when you half-privatize a government agency that’s meant to make housing acessible and de-restrict predatory lending practices.

    Fannie and Freddie owe their genesis to the insecurity of the Depression. They were created to help the market’s invisible hand move things around, and the reason they needed a bailout had to do with them having more exposure to the mortgage crisis than any other outfit.

    They used to hold, essentially, about ten percent of all mortgages.

    As I understand it from The Economist (I’d link, but it’s subscription-only), Clinton’s de-restriction of the home loans process more-or-less failed to allow them the flexibility to turn down bad risks. They assumed an unfair share of bad debt because, under government control, they were required to guarantee loans that the banks refused to take on.

    It’s one of Clinton’s few genuine economic failures, to my mind.

    Comment by Metro — September 11, 2008 @ 5:35 pm

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