Federal regulators on Sunday took over the failing Fannie Mae and Freddie Mac mortgage companies, quasi-government entities that got into trouble with subprime lending.
Officials with the Treasury Department, the Federal Reserve and the Federal Housing Finance Agency seized control of embattled mortgage giants in hopes of stabilizing the housing and financial markets.
Fannie Mae and Freddie Mac purchase or guarantee most of the home mortgages in the U.S. A crisis of investor confidence in the companies sent their stocks spiraling downward earlier this summer as mortgage defaults continued to plague markets across the nation, including Phoenix.
Congress passed legislation in July granting the government the authority to bail out the government-sponsored enterprises (GSEs), and Sunday it exercised that authority.
"We have closely monitored financial market and business conditions and have analyzed in great detail the current financial condition of the GSEs - including the ability of the GSEs to weather a variety of market conditions going forward," said Treasury Secretary Henry Paulson "As a result of this work, we have determined that it is necessary to take action."
That action includes ousting the chief executive officers, Fannie's Daniel Mudd and Freddie's Richard Syron, and placing the companies under conservatorship -- which is similar to Chapter 11 bankruptcy reorganization.
Herbert Allison, former CEO of TIAA-CREF, has been named new CEO of Fannie. David Moffett, former vice chairman and chief financial officer at U.S. Bancorp will take Freddie's helm.
Mudd and Syron have agreed to stay on during the transition in leadership.
The government pledged to inject taxpayer dollars into the companies to prevent insolvency -- up to $100 billion total for each company. It also will also start buying mortgage-backed securities from the companies.
Under the conservatorship agreement, shareholders equity will not be eliminated, though common shareholders will be last in terms of claims on the GSEs' assets.
Preferred shareholders will be placed second, after common shareholders, in absorbing losses.
The takeover of Fannie and Freddie had been expected, with Fitch Ratings last week downgrading their preferred stock to "BBB-," one level above junk status. The ratings agency cited Fannie Mae's $307 billion in Alt-A mortgages and Freddie Mac's exposure to $190 billion in Alt-A mortgages and $6 billion in subprime mortgages as the companies' greatest risks.
Washington, D.C.-based Fannie Mae (NYSE: FNM) and McLean, Va.-based Freddie Mac (NYSE: FRE) have lost a combined $14.9 billion in the last year. Both companies stocks, which had sunk 90 percent in the past 12 months, fell to just over $1 per share Monday. The news, however, sparked a rally on Wall Street Monday among other stocks, including home building and financial companies.
Fannie Mae, the Federal National Mortgage Association, was founded in 1938 and converted to a private corporation in 1968. Freddie Mac, the Federal Home Loan Mortgage Corp., was founded in 1970. Both are among the largest lenders in the secondary mortgage market.
