July 12, 2008
US mulling over rescue of mortgage giants as fears grow
Takeover planned as stocks of Fannie Mae and Freddie Mac sink over
funding concerns
TOKYO - THE United States government is considering taking over
mortgage finance giants Fannie Mae and Freddie Mac if their funding
problems worsen, The New York Times reported yesterday, citing people
briefed on the matter.
Shares of Fannie Mae and Freddie Mac, which are government-sponsored
but privately owned, plummeted this week, as investors questioned the
companies' ability to raise enough capital to stay afloat.
The fate of the companies, often described as the 'twin pillars' of
the American housing market, also has ramifications outside the US,
as foreign central banks hold a record US$978.98 billion (S$1.33
trillion) of US debt, including Fannie Mae and Freddie Mac mortgage
bonds.
News that the US government was considering direct action to save the
two firms boosted Asian stock markets.
Under a plan to place Fannie Mae and Freddie Mac under
conservatorship, the losses on the home loans they own or guarantee -
which amount to half of all US mortgages - will be paid by American
taxpayers, the Times said.
The companies' shareholders will get very little or nothing.
A conservator will have sweeping powers to overhaul Fannie Mae and
Freddie Mac, but will not have the authority to close them.
The Bush administration has also considered calling for legislation
giving an explicit government guarantee on the US$5 trillion of
mortgage debts owned or guaranteed by the firms. That is seen as a
less attractive option because it will effectively double the size of
the country's national debt.
The officials involved in discussions stressed that no action by the
administration was imminent, and that Fannie Mae and Freddie Mac were
not considered to be in a crisis.
A government rescue of both companies would mark the second time that
the US government has had to step in to support the financial system
since mounting defaults in the US sub-prime mortgage industry grew
into a global credit crisis in August last year.
The first time was four months ago, when the US Federal Reserve
backed a plan for JPMorgan Chase to buy investment bank Bear Stearns.
Enough concern has built among US government officials over the
health of Fannie Mae and Freddie Mac for them to hold a series of
meetings and conference calls to discuss contingency plans.
So far this week, Freddie Mac shares have plunged 45 per cent, while
Fannie Mae stock has lost 30 per cent. Their stock prices have been
pummelled this year after soaring delinquencies on home loans saw
them lose a combined US$11 billion.
Now, as housing prices decline further and foreclosures grow, the
markets are worried that Fannie Mae and Freddie Mac themselves may
default on their debts. There was also talk that they may need to
raise as much as US$75 billion of new capital to survive.
'If the situation is that serious, the US stock market is likely to
fall further on risk aversion and on concerns of a massive new share
issue to capitalise the mortgage firms,' said Shinko Securities chief
economist Hideki Hayashi in Tokyo.
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