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Key US lenders to face new curbs

  • 06-09-2008 4:54pm
    #1
    SimpleSam06
    Closed Accounts Posts: 4,048 ✭✭✭


    Some interesting news from the Beeb...
    US mortgage giants Freddie Mac and Fannie Mae face being put under government control in an attempt to rescue the firms, media reports say. Top bosses would be removed under the US Treasury plans - which could see the US's largest ever financial bail-out. The shareholder-owned companies, which are mandated to provide funding to the US housing market, hold or guarantee half the country's mortgage debt.

    In July, Congress approved a plan aimed at offering them more liquidity. This followed huge losses by the two firms as result of a big increase in defaults and repossessions in the US housing market.

    'Management told'

    The Washington Post, citing senior administration sources, said the firms would be put under a legal status known as "conservatorship" which would greatly reduce the value of the two companies' common stock.

    Other securities - including company debt and preferred shares - would be guaranteed by the government, the paper added. The New York Times reported that senior executives at Freddie Mac and Fannie Mae were informed about the plan on Friday.

    The Wall Street Journal said it would include changes in the top management. There would also be quarterly infusions of cash to keep both firms afloat, the papers say. The total cost to taxpayers is not known but could amount to billions of dollars, they add. The Associated Press news agency said official confirmation of the plan could come this weekend.

    Fragile

    On Friday America's Mortgage Bankers Association reported that at the end of June, about four million homeowners with a mortgage - representing a record 9% - either were behind in their payments or faced repossession.

    In the past year, the financial crisis have taken a heavy toll on both Fannie Mae and Freddie Mac. The country's two largest buyers and backers of mortgages lost a combined $3.1bn between April and June. Both companies say they have the resources to weather the losses, but their shares have fallen sharply on fears that they could go bankrupt as borrowers default.

    The rescue plan passed by Congress in July gave the US government the authority to buy shares and offer liquidity to companies to keep them afloat. Many analysts believe their collapse would be a major shock to the already fragile global financial system.

    Together, the two firms own or guarantee about $5.3 trillion worth of home loans - about half the outstanding mortgages in the US. That is about 25 times as big as the obligations of Northern Rock - which was nationalised by the UK government earlier this year, and twice the size of the UK economy.
    This could be among the signs that the Alt-A and Prime mortgage markets are toppling, which would make the subprime crisis look like a ten euro flutter down the Galway races.


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