08 Sep 2008, David Benyon , Operational Risk & Regulation
WASHINGTON, DC – The US government has rescued the mortgage lenders Fannie Mae and Freddie Mac, confirming market expectations by taking responsibility for almost half of the $12 trillion of US mortgage debt.
The move, dubbed ‘conservatorship’, means temporary nationalisation of the two state-sponsored lenders, and marks the moment when the long-presumed unwritten guarantee of the two lenders was finally tested.
Fannie and Freddie had already run up debts of over $1.6 trillion over the past 12 months, mostly as a result of the fall in house prices brought on by the failure of the subprime mortgage sector.
The US government had already agreed to buy up shares in the two lenders, in addition to initiating Treasury protection schemes guaranteeing their debts. Yesterday’s agreement marks the end of that process.
Chairman of the Federal Reserve, Ben Bernanke, said in a statement: “I strongly endorse both the decision by FHFA [Federal Housing Finance Agency] director [James] Lockhart to place Fannie Mae and Freddie Mac into conservatorship, and the actions taken by Treasury secretary [Henry] Paulson to ensure the financial soundness of those two companies.”
He said: “These necessary steps will help to strengthen the US housing market and promote stability in our financial markets. I also welcome the introduction of the Treasury's new purchase facility for mortgage-backed securities, which will provide critical support for mortgage markets in this period of unusual credit-market uncertainty.”
Fannie Mae and Freddie Mac were created by President Roosevelt in 1938, as part of his ‘New Deal’ to provide liquidity to the US mortgage market during the Great Depression, before privatisation in 1968.
Fannie Mae and Freddie Mac – after already undergoing boardroom purges within the past month – are now under the control of the FHFA.
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