U.S. To Take Over Mortgage Giants Fannie, Freddie

The Treasury Department is poised to announce it will takeover Fannie Mae and Freddie Mac, which together back roughly half of all outstanding U.S. mortgages. The government intervention comes after the companies lost billions in the housing market turmoil, with no sign things are getting better.

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LIANE HANSEN, host:

From NPR News this is Weekend Edition. I'm Liane Hansen. The U.S. Treasury Department is expected to announce today that the government will step in to take over mortgage giants Fannie Mae and Freddie Mac. Between them, the two back or guarantee roughly half of all outstanding U.S. mortgage loans. The companies have lost billions of dollars due to turmoil in the housing market. In a moment, we'll hear from an economist on what this takeover means for taxpayers. First, NPR's Jack Speer gives us some background on the situation.

JACK SPEER: Fannie Mae and Freddie Mac were created by Congress to free up money for the mortgage market. And while they were eventually privatized, the two have always operated to some extent with the implied guarantee of the federal government. But that implied guarantee is likely to get much more explicit now according to Bert Ely, a banking and monetary policy expert.

Mr. BERT ELY (Banking and Monetary Policy Expert): The understanding is that the two companies are going to be put into conservatorship, which is kind of a form of a Chapter 11 bankruptcy. And accompanying that would be firing of the top management and the directors of the two companies, a more direct government control of them. But that's only going to be the first step.

SPEER: Congress back in July gave Treasury the authority to take action if Fannie and Freddie ran into trouble, and that appears to be what has happened. Leslie Paige is with the group Taxpayers Against Government Waste. She says things never should have gotten to this point in the first place.

Ms. LESLIE PAIGE (Spokeswoman, Taxpayers Against Government Waste): I remember the day when the officials from Fannie Mae and Freddie Mac sat before members of Congress and explicitly stated that there was zero risk to the taxpayer in what they were doing. And that was absolutely false at the time that they said it, and now we see the results. Now the taxpayer is going to be pulled in and made to belly up and ending up with a huge amount of money to bail these companies out. And they were irresponsible. And Congress was irresponsible in its leadership role.

SPEER: If the federal government has to put cash into the two companies, it's not entirely clear how it would be done or how much money would be needed. Also unclear is what a government bailout will mean for stockholders who have already seen the value of their holdings in the two companies fall by more than 80 percent this year. Banking expert Bert Ely says figuring all that out could be a somewhat lengthy process.

Mr. ELY: (Unintelligible) not only what should be the fate of these companies over the longer term, but to what extent do we need to have a major rethink and restructuring of the way in which we finance houses in this country.

SPEER: But one thing that is clear is with the announcement, Treasury realizes what those on Wall Street have long known. With the two companies guaranteeing or backing roughly half of the nation's 12-trillion-dollar mortgage market, Fannie Mae and Freddie Mac are simply too big to be allowed to fail. Jack Speer, NPR News, Washington.

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