Paulson: Mortgage Takeover Key For Economy

Treasury Secretary Henry Paulson speaks at a news conference on Sunday. i i

hide captionTreasury Secretary Henry Paulson speaks at a news conference announcing a federal takeover of Fannie Mae and Freddie Mac on Sunday.

Brendan Hoffman/Getty Images
Treasury Secretary Henry Paulson speaks at a news conference on Sunday.

Treasury Secretary Henry Paulson speaks at a news conference announcing a federal takeover of Fannie Mae and Freddie Mac on Sunday as Federal Housing Finance Agency Director James B. Lockhart looks on.

Brendan Hoffman/Getty Images

In Depth: Planet Money Blog

The federal takeover of Fannie Mae and Freddie Mac is aimed at preventing a "serious risk to the financial system," which is "critical to our overall economy," Treasury Secretary Henry Paulson tells NPR.

The Bush administration on Sunday said it was taking over Fannie Mae and Freddie Mac, the troubled mortgage companies that play a key role in the U.S. housing industry. The administration said it would funnel billions of dollars in taxpayer money into the companies to help keep them afloat.

In July, when Congress gave the administration authority to take over the two mortgage giants, Paulson said he had no plans to use that power. But on Sunday, Paulson said in an interview with NPR's John Ydstie, "there's a number of things that have changed."

"First, we got into Fannie and Freddie and we learned that there was a capital deficiency that needed to be addressed," Paulson said. "And No. 2, markets are increasingly jittery here and around the world. And investors are starting to more frequently ask the questions, 'How do we make a long-term equity investment in Fannie Mae and Freddie Mac if we don't know what they're ultimately going to look like?' "

The Congressional Budget Office has estimated that a takeover of Fannie and Freddie could cost taxpayers $25 billion, and other analysts have forecast a higher amount.

Asked why it was necessary to put taxpayers at risk, Paulson said, "Well, our objective here is to prevent a serious risk to the financial system which would hurt all taxpayers because our financial system is just critical to our overall economy. Anybody that wants to have a car loan, a mortgage, any kind of credit, needs a strong financial system."

"We've structured this very carefully to protect the taxpayers. And, to the extent taxpayers are going to put preferred stock into this entity, it will be structured so that the first losses will be borne by the existing shareholders."

Paulson said the shareholders are "hopefully not being wiped out, but this will take time. But if things work well and housing prices stabilize and, over time, our economy does better, the shareholders have the hope of having their share prices appreciate. And that is certainly true of the preferred shareholders also."

Asked how the public will know if the rescue plan is working, Paulson said, "I think the average American should look to the availability of mortgage finance, and hopefully if this works, over time you're going to continue to see an abundant supply of mortgage financing that is reasonably priced."

"Another key indicator is, over time, the economy will stabilize and the financial institutions in the United States will do better, because it is our view that at the heart of the current economic challenge we have in the United States is a housing correction."

Paulson was asked how long the government takeover will last and how officials will ensure that such a crisis involving government-sponsored entities doesn't happen again.

"Well, [that] is the major question. It's one I focused on," Paulson said. "Because although the short-term objective is to stabilize and help us ride through this housing correction, these organizations had major structural flaws.

"In the future, we're going to need to clarify whether there is clearly a government guarantee or whether there is no government guarantee. We're going to have to decide whether we want to have government support for private profit. We're going to have to decide how to deal with systemic risks.

"And you ask how long. I'm hoping it can be done in the next couple of years."

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