Fannie, Freddie to be taken over by Treasury

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By Patrice Hill

The nation's year-long housing and financial markets crisis entered a new and unprecedented stage this weekend as the Treasury Department prepared to take control of Fannie Mae and Freddie Mac to ensure that Americans can continue to have easy access to cheap mortgage credit.

Attempts by Freddie Mac, the more troubled of the two mortgage finance giants, to raise money in private markets have faltered in recent weeks since Treasury pushed through legislation enabling it to provide the mortgage agencies with a financial backstop. Freddie's wavering fortunes, combined with escalating default rates on home loans, have forced up the cost of mortgages and held back the struggling housing market.

In a dramatic attempt to break the downward spiral in the credit and housing markets, the Treasury has informed Fannie and Freddie that it will take control of agencies and provide regular cash infusions as necessary to ensure the smooth functioning of the mortgage markets according to government and Wall Street sources.

Treasury's move -- which exposes U.S. taxpayers to a minimum of $25 billion in costs and potentially more -- is expected soon, perhaps this weekend. The structure and extend of the intervention was not clear, the official said.

As a condition of taking what the Treasury hopes will be temporary control of the agencies, the government will insist on the departure of Fannie Mae chief executive Daniel Mudd and Freddie Mac chairman Richard Syron, both highly paid executives who have been unable to turn the companies around as they sank deeper into the mortgage morass this year. The Treasury also will oust the companies' board of directors and senior management.

While Fannie Mae is believed to be in better condition than Freddie Mac, with fewer sub-prime loans on its books, it has been hit increasingly by defaults on prime mortgages in areas of Florida, California and Nevada where home prices have fallen by as much as 50 percent and people are choosing to walk away from their homes and mortgage obligations. Recent estimates show that nearly one in ten U.S. mortgages is behind payment or in foreclosure.

Altogether the two mortgage giants own or guarantee more than half of U.S. mortgages, and their importance increased greatly this year after the private market for mortgages imploded. Fannie and Freddie currently fund around three-quarters of all mortgages in the country, making them indispensable to the economy in the eyes of Treasury Secretary Henry Paulson. The Treasury's action is expected to wipe out most of the value of Fannie and Freddie common stock, a government official said.