Government Looking at Takeover of Fannie, Freddie: Reports

Reports of a possible government takeover of Fannie Mae and Freddie Mac were widespread on news wire services early Friday, and at least on Wall Street, the reports were met with some perception of validity as the shares of both stocks were delayed in their initial opening and were sharply down when they did begin trading. Shares of both had also been hammered the day before and were slashed by more than half during the course of the week.

Both Fannie Mae’s (NYSE: FNM) and Freddie Mac’s (NYSE: FRE) shares were down more than 30 percent in midday trading Friday.

According to the wire reports, the government is considering a plan that would place the companies into conservatorship, which would effectively wipe out the equity of shareholders and would put bondholders at risk. Bondholder risk is unclear due to Freddie and Fannie’s status as government-sponsored entities, according to the wire reports.

It would also mean the losses on home loans they own or guarantee — half of all U.S. mortgages — would be paid by taxpayers, much like the government’s bailout of a large proportion of the nation’s savings and loans nearly 20 years ago.

The Federal Deposit Insurance Corp., the primary regulator for most banks, details the history of savings and loans and that government bailout on a page on its Web site.

Eva Weber, analyst for Aite Group, told insideARM that the government could be floating the idea of a takeover to get some discussions and feedback going about the idea.

“A large move like this wouldn’t come unannounced, so to speak,” Weber said. “We would have a lot of scrutinization of Fannie and Freddie before any plan was hammered together.

“If [the take over] did happen, could lead to further tightening of credit and more scrutiny of the secondary market, which wouldn’t necessarily be a bad thing,” Weber added.

In a short mid-morning statement that sought to assuage fears, Treasury Secretary Henry Paulson said the government is committed to "supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission."

“We appreciate Congress’ important efforts to complete legislation that will help promote confidence in these companies,” Paulson continued. “We are maintaining a dialogue with regulators and with the companies. The Office of Federal Housing Enterprise Oversight (OFHEO) will continue to work with the companies as they take the steps necessary to allow them to continue to perform their important public mission.”