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SCOTT SIMON, host:

This is Weekend Edition from NPR News. I'm Scott Simon. The U.S. government is preparing to take over Fannie Mae and Freddie Mac, this according to reports in The Wall Street Journal and today's New York Times. An official announcement could come as early as this weekend. NPR's John Ydstie joins us. John, thanks for being with us.

JOHN YDSTIE: You're welcome, Scott.

SCOTT: These are mortgage giants, huge financial organizations, trillions of dollars in obligation. How would a government takeover work?

YDSTIE: Well, according to sources quoted by The Journal and Times, the government is going to put the two organizations into conservatorship under the control of their new regulator, the Federal Housing Finance Agency. Shareholders in the companies are likely to be wiped out completely or get very little for their shares. And according to the reports, the top management of the companies were told in a meeting with Treasury Secretary Paulson, Fed Chairman Bernanke, and their top regulator James Lockhart yesterday that they will ultimately be removed. But the companies would continue to do business much as they have before, buying up mortgages, packaging them into securities, and then selling them to investors.

SIMON: Why would the government act now?

YDSTIE: Well, you know, there's no immediate crisis in terms of imminent collapse, as was the case in the Bear Stearns rescue back in March. But what's happened is the housing market has continued to deteriorate. We saw that in another report yesterday from the Mortgage Bankers Association which reported foreclosures are continuing to rise, and even in loans to prime borrowers. This is beyond subprime now. And Freddie and Fannie guarantee five trillion dollars worth of mortgages. Most of them these prime mortgages. And it's an ominous sign to see those safer loans going bad and contemplate what that might mean in terms of losses for the companies.

The two companies have already reported billions of dollars in losses. They're having trouble raising capital to cover future loses. And the economy just can't afford to have these two giant companies, which are now responsible for making about 70 percent of the mortgages in the economy - they can't be allowed to fail. It would be - essentially, it would seize up the mortgage market. Getting a mortgage, buying or selling a home, would be impossible.

SIMON: But doesn't the government takeover just put billions of taxpayer dollars at risk?

YDSTIE: Well, yes, it does. But, you know, they're already at risk. The government has basically said that it backs the obligations of these companies already, and that's really how we've gotten into this trouble over the years. There's no way of knowing how much it might cost taxpayers to make good on the mortgages that are going into foreclosure. Certainly in the tens of billions of dollars. But the problem with leaving these companies floundering is that financial companies in distress often take bigger and bigger risks, get themselves deeper and deeper into trouble. And officials probably feel that since the government is on the hook already, it's just time to take control and limit the losses.

SIMON: Any indication about the long term for Fannie Mae and Freddie Mac? Will the government continue to run them as government enterprises?

YDSTIE: Well, both presidential candidates have expressed dissatisfaction with the companies in their current form. And I think because they're basically privatizing the profits and socializing the losses, as we're seeing happen right now. I think the common view is that the companies should be taken over by the government, as appears to be happening, and that over time they should be shrunk or broken up into small pieces, re-privatized as smaller companies that aren't too big to fail.

SIMON: NPR's John Ydstie, thanks very much for being with us this morning.

YDSTIE: You're very welcome, Scott.

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