The US government on Sunday seized control of mortgage finance companies Fannie Mae and Freddie Mac in an aggressive move to help avert a financial system meltdown from the housing crisis. The companies, which together own or guarantee about $5 trillion in home loans, almost half of the country's $12 trillion in outstanding home mortgage debt,, have lost $14 billion in the last four quarters and large holders of their debt, including overseas central banks, have begun to show signs of increasing nervousness over their financial health. The move may help overall market sentiment, particularly in Asia, which also is nervous about the overall sluggish US economy and rising inflation. Fannie and Freddie provide funding for loans to US homeowners, then package the loans and sell them to investors as securities. Non-US investors have flocked to Fannie and Freddie's mortgage-related debt in recent years, enjoying the higher returns it provides compared with US Treasury but assuming the government would be just as likely to back the debt in the event of trouble. The decision to take control of the companies, which have $1.6 trillion in debt outstanding, and place them into a conservatorship under their regulator could amount to the largest financial bailout in US history. The Treasury Department, which is taking an equity stake in the two firms, said there was no reason to expect that taxpayers would have to shoulder losses. President George W. Bush said Sunday that the historic takeover of Fannie Mae and Freddie Mac is needed to keep them from failing, a risk he called “unacceptable” for an economy battered by housing and credit crises. “Allowing the companies to fail or further deteriorate would damage our home mortgage market, and could weaken other credit markets that are unrelated directly to housing,” Bush said in a statement. “Americans should be confident that the actions taken today will strengthen our ability to weather the housing correction and are critical to returning the economy to stronger sustained growth.” As part of the plan, FHFA will operate the companies until they are stabilized and the Treasury will extend financing until Dec. 31, 2009, if needed. In addition to the new financing facility, Treasury said it will take an equity stake in the two firms through senior preferred equity shares and warrants. “Under the terms of the agreement, common and preferred shareholders bear losses ahead of the new government senior preferred shares,” US Treasury Secretary Henry Paulson said said. Treasury also set up a program under which it would buy $5 billion of mortgage-backed securities currently held by Fannie Mae and Freddie Mac, to pump fresh funds into the mortgage market. . It said it would begin buying MBS later this month, and it would have authority to make such purchases through Dec. 31, 2009.
