Government Considers Takeover Of Fannie Mae, Freddie Mac
Fears continue to escalate about the future of mortgage giants Fannie Mae and Freddie Mac. On July 11, both the New York Times and the Wall Street Journal reported that federal officials were weighing a government takeover of one or both of the companies, placing them in a conservatorship if problems worsen.
Fannie Mae and Freddie Mac guarantee about half of all mortgages in the United States. If regulators were to place the companies in a conservatorship, their common shares would be worth little or nothing, and essentially double the size of public debt by adding about $5 trillion in potential obligations to the nation’s balance sheet, according to the New York Times.
As of Friday, shares of Fannie Mae and Freddie Mac stock had fallen nearly 50 percent, following concerns by investors that both companies were looking at additional losses and possible default on debt.
Both Fannie Mae and Freddie Mac are privately owned government-sponsored enterprises (GSEs), and play a critical role in the country’s mortgage market. As explained by the Wall Street Journal, Fannie Mae and Freddie Mac are shareholder-owned companies that buy mortgages, package them into securities and then sell them to investors. The companies do not actually make home loans but instead provide stability and liquidity to the mortgage market by guaranteeing that investors who buy mortgage securities will receive timely payments of principal and interest.
Should a conservatorship for Fannie Mae and Freddie Mac actually come to fruition, it would be the second time in less than five months that such a rescue plan was engineered to avoid a crisis in the nation’s financial markets. In March, in order to prevent the bankruptcy of Bear Stearns, the Federal Reserve stepped in to facilitate the sale of the 85-year-old investment banking giant to JPMorgan Chase for $236 million. In January 2007, Bear Stearns was worth $20 billion.
Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.
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