The US government has announced that it is taking control of troubled mortgage finance giants Fannie Mae and Freddie Mac, in its latest effort to shore up the slumping housing market.
US Treasury Secretary Henry Paulson said: ‘Our economy and our markets will not recover until the bulk of this housing correction is behind us’.
The two companies, publicly traded but also serving a government mission to support housing, were put in a conservatorship that allows their stock to keep trading but puts common shareholders last in any claims.
Freddie Mac chief executive Richard Syron and Fannie Mae's CEO, Daniel Mudd, were replaced by David Moffett, a former top official at US Bancorp and Herb Allison, a former top official at both Merrill Lynch and pension fund TIAA-CREF.
In addition, the US Treasury will immediately take $1 billion (€702.6m) equity stakes in each company that could grow to be as large as $100 billion (€70.26bn) each and which would be senior to both existing preferred and common shares.
The senior preferred stock in each GSE will carry warrants that will give the government an ownership stake of 79.9 percent.
The Treasury will initially purchase an upfront $1 billion worth of senior preferred stock in each GSE, with a 10 percent coupon, quarterly dividend payments, and warrants representing an ownership stake of 79.9 percent in each GSE going forward, and a quarterly fee starting in 2010.
The Treasury also set up a programme under which it would buy 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 31 December, 2009.
Officials were concerned mounting losses at the two companies, which own or guarantee almost half of the country's $12 trillion (€8.43 trillion) in outstanding home mortgage debt, was sapping their vitality and threatening to undermine them at a time other sources of housing finance had largely run dry.
