The existence of the mortgage finance companies: Fannie Mae (FNM) and Freddie Mac (FRE), which own and guarantee $5.4 trillion in outstanding home mortgage debt, as of today, according to the WSJ - is in the hands of the US Government who seized control of both mortgage giants as of Sunday morning.
Clearly, the effects of a softening economy which keeps facilitating the deterioration of an already weak housing sector, together with the mounting losses at both GSEs of nearly $14 billion in the last four quarters, and an inflationary and credit environment continuously working its way through the property sector ; prompted the U.S. federal regulators to launch what could be perhaps, Washington’s biggest federal bail-out ever.
In a statement made today, by Secretary Henry M. Paulson, the two companies - based on a four step plan devised with the collaboration of Federal Housing Finance Agency (FHFA), the U.S. Treasury, and the Federal Reserve, will be placed under a conservatorship and will be overseen by the FHFA. The conservatorship will not however, eliminate the outstanding preferred stock. Both co. stocks will keep trading - but the move will place preferred shareholders second, after the common shareholders, in absorbing losses. Also, as part of the takeover, dividends on Fannie and Freddie’s common and preferred stock will be eliminated in an effort to conserve about $2 billion annually.
The second step taken by the Treasury Dept., since both Freddie & Fannie are chartered by the US government to keep money flowing to the housing market, is the establishment of a new secured lending credit facility, intended to serve as an ultimate liquidity backstop, which will be available to both GSEs, and the Federal Home Loan Banks, through December 31, 2009. According to Treasury - the loans would be offered in exchange for collateral in the form of Mortgage-Backed Securities (MBS) issued by Fannie and Freddie and they would be short term — less than a month but no shorter than one week.
In addition, to further support the availability of mortgage financing for a proper functioning of the markets, Treasury will initiate a temporary program to purchase GSE Mortgage-Backed Security. The U.S. Treasury will immediately take a $1 billion equity stake in each company in the form of senior preferred stock with the option of injecting up to $100 billion into each firm. As result of the government’s equity stake, which would rank it above, both, preferred and common shares while carrying warrants, the govt. will obtain an ownership stake of nearly 80% in each firm, with a quarterly fee starting in 2010.
Mr Paulson said:
Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe.
However, he admitted that the move came at an unknown cost to America taxpayers, saying: “In the end, the ultimate cost to the taxpayer will depend on the business results of the GSEs going forward.”
Both GSEs top executives were ousted. Freddie Mac chief executive Richard Syron and Fannie Mae’s CEO, Daniel Mudd, were replaced respectively by David Moffett, a former top official at US Bancorp with more than 30 years of strategic finance and operational experience in banking and payment processing, and Mr Herb Allison, formerly with Merrill Lynch where he served as President and Chief Operating Officer until 1999. In November 2000 Mr Allison assumed the role of chairman, president and CEO of pension fund TIAA-CREF, until 2008.
By giving the mortgage giants time to restore their balances, and by stabilizing them so they can better perform their mission, today’s action should accelerate stabilization in the housing market, help improve the economy and the GSEs’ business outlook.
