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U.S. Considers Takeover of Fannie Mae, Freddie Mac, NYT SaysU.S. Considers Takeover of Fannie Mae, Freddie Mac, NYT SaysBy Joseph Galante and Gareth Nicholson July 11 (Bloomberg) -- U.S. officials are considering a plan to have the government take over one or both of Fannie Mae and Freddie Mac, the largest buyers of U.S. home loans, if they continue to deteriorate, The New York Times reported. The companies would be placed under conservatorship if their problems worsen, the newspaper said today, citing unidentified government officials briefed on the plan. The shares of the two firms would be worth little or nothing under this proposal and any losses on mortgages they own or guarantee, which could be ``staggering,'' would be paid by taxpayers. Their shares are plunging and their borrowing costs are rising as investors worry the companies will suffer losses larger than the $11 billion they have lost in recent months, the report said. The Bush administration is also considering offering an explicit government guarantee on the $5 trillion debt owned or guaranteed by the companies, the Times said. Such an option is less likely because it would double the public debt, the newspaper said. The officials involved in the discussions stressed that no action by the administration was imminent, and that Fannie Mae and Freddie Mac are not considered to be in a crisis situation, the newspaper reported. The companies, created to boost homeownership and promote market stability, own or guarantee about half the $12 trillion in U.S. home loans outstanding. In addition to those obligations, Fannie Mae has $831 billion in company bonds outstanding, while Freddie Mac has $644 billion, according to Bloomberg data. Slumping Shares Senator John McCain, the presumptive Republican presidential nominee, said yesterday the federal government can't allow them to fail. Shares of the two firms fell to their lowest levels in 17 years in New York yesterday, after former St. Louis Federal Reserve President William Poole said they may need a government rescue. Central banks, pension funds and other investors hold $5.2 trillion in debt sold by the companies. Chances are increasing that the U.S. will bail out Fannie Mae and Freddie Mac because they don't have enough capital to weather the worst housing slump since the Great Depression, said Poole in an interview with Bloomberg. Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules. The fair value of Fannie Mae assets fell 66 percent to $12.2 billion, data provided by the Washington-based company show, and may be negative next quarter, Poole said. Fair value accounting measures a company's net worth if it had to liquidate all of its assets to repay liabilities. Fannie Mae and Freddie Mac, both of which have the implicit backing of the government, make money by borrowing in the bond market and reinvesting the proceeds in higher-yielding mortgages and securities backed by home loans. Fannie Mae slumped $2.11 to $13.20 yesterday, extending declines for the year to 67 percent. Freddie Mac tumbled $2.26 to $8, taking its 2008 slide to 77 percent. SOURCE :: To contact the reporter on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.net
Last Updated: July 11, 2008 00:29 EDT 
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