Mortgage Rate News

It’s finally happened. The U.S. government has acknowledged the inevitable and called the executives of Fannie Mae and Freddie Mac in to let them know that the government will be taking them over.

This move, which is expected to be officially announced by Sunday, has been coming on for quite some time. Even with the new rules offered to Fannie Mae and Freddie Mac, giving them more flexibility, when the housing relief bill was passed a few weeks ago, have not been enough to save them. And now the government plans to put the two companies under conservatorship, reports the New York Times:

A conservatorship would operate much like a pre-packaged bankruptcy, similar to what smaller companies use to clean up their books and then emerge with stronger balance sheets. It would allow for uninterrupted operation of the companies, crucial players in the diminished mortgage market, where they are now responsible for nearly 70 percent of new loans.

Freddie Mac’s chief executive is actually under more scrutiny, since that company failed to raise less capital than Fannie Mae, and he has still pulled down  $38 million since 2003. (Hmmm…maybe if he didn’t make so much, more of it would have gone to help capitalize the company.) At any rate, here are two more features of a government conservatorship plan:

1. The boards of the companies would be replaced.
2. Shareholders would lose big time, as they would receive only nominal compensation for their shares.

The plan, though, is to rescue both government sponsored enterprises before things get as dire as they were as Bear Stearns collapsed. And the government also considers Fannie and Freddie as vital to keeping the mortgage market/housing market even somewhat solvent at this point — not to mention assuring foreign investors that they will back the companies up.

Tags: Fannie Mae, Freddie Mac, home mortgage loan, mortgage market,
housing market, Bear Stearns, government takeover