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US Government Seizes Control of Mortgage Giants

September 7th, 2008 Posted in Breaking News

Excerpt of AP News Report By ALAN ZIBEL and MARTIN CRUTSINGER

The Bush administration seized control Sunday of troubled mortgage giants Fannie Mae and Freddie Mac, aiming to stabilize the housing market turmoil that is threatening financial markets and the overall economy.

Treasury Secretary Henry Paulson is betting that providing fresh capital to the two firms will eventually lead to lower mortgage rates, spur homebuying demand and slow the plunge in home prices that has ravaged many areas of the country.

The huge potential liabilities facing each company, as a result of soaring mortgage defaults, could cost taxpayers tens of billions of dollars, but Paulson stressed that the financial impacts if the two companies had been allowed to fail would be far more serious.

“A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance,” Paulson said.

But more importantly, “Fannie 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 markets here at home and around the globe,” he added in a televised announcement.

The companies, which together own or guarantee about $5 trillion in home loans, about half the nation’s total, have lost $14 billion in the last year and are likely to pile up billions more in losses until the housing market begins to recover.

Both companies were placed into a government conservatorship that will be run by the Federal Housing Finance Agency, the new agency created by Congress this summer to regulate Fannie and Freddie.

The executives and board of directors of both institutions are being replaced. Herb Allison, a former vice chairman of Merrill Lynch, was selected to head Fannie Mae, and David Moffett, a former vice chairman of US Bancorp, was picked to head Freddie Mac.

The Treasury Department said it will immediately inject $1 billion in each of the companies through the purchase of senior preferred stock, paying 10 percent interest, and could boost its investment to as much as $100 billion each over time if the funds are needed to keep the companies afloat as losses mount. In exchange, the government will receive warrants entitling it to purchase ownership stakes of 79.9 percent in each.

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