US places troubled Fannie and Freddie in care

The US government is taking control of the mortgage giants Fannie Mae and Freddie Mac and the $5.5 trl of home loans they control. Washington's dramatic rescue package includes the injection of $200 bn of public money into Fannie Mae and Freddie Mac - the linchpins of the US home loan system - to prevent a total meltdown of the housing market. The sector has been reeling since the onset of the subprime mortgage crisis.

Announcing the radical takeover plan at a press conference on Sunday, Treasury secretary Henry Paulson and James Lockhart, director of the Federal Housing Finance Agency, said that Fannie Mae and Freddie Mac would be placed in 'conservatorship', under which they will be overseen by the FHFA until the two companies are stabilised.

Daniel Mudd, CEO of Fannie Mae, and Richard Syron, his counterpart at Freddie Mac, are stepping down from their positions, though the Treasury was careful not to blame them for the $12 bn in losses suffered by the mortgage giants in the last year. Mudd and Syron have agreed to stay on to help with the transition.

Explaining the government's intervention in the affairs of the publicly listed entities, Paulson said the two institutions were unique and more exposed than other financial institutions to the housing correction. 'A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance.'

He said a failure would also be harmful to economic growth and job creation. 'I have long said that the housing correction poses the biggest risk to our economy. It is a drag on our economic growth, and at the heart of the turmoil and stress for our financial markets and financial institutions. Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner on housing.

Fannie Mae and Freddie Mac do not issue mortgages directly to the public. They operate by buying mortgages from lenders. Some of the loans are held by the two agencies while others are repackaged and resold as mortgage-backed securities. This provides banks and other lenders with the funds to issue new loans.

Fannie Mae, short for the Federal National Mortgage Association, was established as government agency in 1938 to give million of families hit by the Depression to access mortgage financing. The company was privatised in 1968 and operated from then on as a Government Sponsored Enterprise (GSE). This status granted the listed company exemption from taxation and the benefit of government backing. Freddie Mac was established as a GSE in 1970 as competition for Fannie Mae.