The Bush administration ripped up years of laissez-faire economic
policies last night and launched a government takeover of two of the
most powerful mortgage companies in the US. The move is designed to
forestall a collapse in house prices that could plunge America into a
new Great Depression and trigger chaos on the world's financial markets.
seizure of the two lenders, Fannie Mae and Freddie Mac, puts a federal
guarantee behind an extraordinary $5trn of outstanding mortgage debt,
and writes a blank cheque from the US taxpayer that could ultimately
run into tens of billions of dollars of support for the country's
ailing housing market.
The US Treasury Secretary, Henry Paulson,
said that by bringing the companies under government control, the
government could ensure they continued to do their vital work providing
financing to the mortgage market. Without them, few Americans would be
able to find loans to buy homes, consumer confidence could collapse and
the already fragile global economy would contract dramatically.
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 values, to savings for college and retirement. A failure
would affect the ability of Americans to get home loans, auto loans and
other consumer credit and business finance. And a failure would be
harmful to economic growth and job creation."
In the US, Fannie
and Freddie own or guarantee almost half of all outstanding mortgages.
Their finances have been wrecked by the credit crisis and by rising
mortgage defaults by American homeowners.
The backlog of
properties for sale is at its worst since modern records began, as
repossessions mount. Fannie and Freddie have had to absorb $14bn of
losses in the past year and, with more to come, they needed a huge
injection of capital just to survive.
A secret government
review of Freddie Mac's finances found that it might be in an even more
parlous state than was previously feared, prompting the US Treasury to
act yesterday before the financial markets reopened. For months,
investors have fretted about the risks posed by the tottering
companies, even as executives said they expected to be able to raise
cash from Wall Street and overseas.
It is now clear that the
necessary funding will have to come from US taxpayers. An initial $1bn
will be followed by extra money as needed, Mr Paulson said. The
Treasury will also directly purchase mortgage-backed securities from
Fannie and Freddie, starting with $5bn this month. In return, the
companies have agreed to a "conservatorship" under the oversight of the
Federal Housing Finance Agency. The government could end up owning 80
per cent of the two.
They will have to be slimmed down to about a
third of their current size, Mr Paulson said yesterday, although that
could prove politically controversial. The Democrats have long seen
Fannie and Freddie as a useful means of encouraging home ownership by
providing access to cheap mortgage finance. Mr Paulson briefed the US
presidential candidates, John McCain and Barack Obama, about his plans
over the weekend. Mr Obama said he understood the situation was
"extremely serious", adding: "Any action we take must be focused not on
the whims of lobbyists and special interests worried about their
bonuses and hourly fees, but on whether it will strengthen our economy
and help struggling homeowners."
Mr McCain also supported the
bail-out, saying: "There has got to be restructuring, there has got to
be reorganisation and there has got to be some confidence that we have
stopped this downward spiral."
In his first action as de facto
boss of the two companies, Mr Paulson sacked their chief executives
yesterday, installing the manager of a teachers' pension fund to run
Fannie Mae and a banking executive to run Freddie Mac.
Mae was first created as a government agency to help pull the US out of
the depression of the 1930s by creating a secondary market for
mortgages. It was privatised in 1968, and Freddie Mac was created as a
similar shareholder-owned company two years later.
attempts by the Bush administration to shrink the two companies, they
have become even more vital to the housing market since the credit
crunch struck and Wall Street stopped providing alternative finance to
the mortgage industry. Two in every three new mortgages agreed in the
US are with Fannie Mae or Freddie Mac.
Even more significant in
many Treasury officials' minds is the pivotal role they play in the
modern world of inter-connectedfinancial markets. Almost $1trn of debt
issued by the two companies is held overseas byforeign governments, and
their failure could have triggered a flight of capital from the US.
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Giants of the mortgage market
*Fannie and Freddie between them account for $5.3trn (£3trn), or around half of the US mortgage market
*In 2008, Fannie and Freddie issued more than 80 per cent of all new mortgages
*A homebuyer with a $150,000 mortgage can save $18,000 in interest, according to Freddie Mac marketing
Mae, or the Federal National Mortgage Association (FNMA), was set up as
a government agency in 1938 as part of Roosevelt's New Deal. It became
a private corporation in 1968. Freddie Mac was born as the Federal Home
Loan Mortgage Corporation (FHLMC) in 1970
*Freddie Mac has financed homes for more than 50million people since 1970
than 95 per cent of Freddie-financed apartment units, and more than
half of Freddie house mortgages, are owned by low- to middle-income
*Foreign governments hold almost $1trn in Fannie and Freddie bonds and 66 central banks have investments in Freddie securities
*In August Freddie Mac admitted that its debts outstripped its assets by $5.6bn
*Fannie Mae employs 6,400 people, Freddie Mac 5,000
*By July Fannie and Freddie had lost $12bn since the sub-prime crisis began a year before
*Housing and related industries represent a fifth of the US economy