U.S. Weighs Rescue of Mortgage Giants

By Jeffrey H. Birnbaum and Neil Irwin
Washington Post Staff Writers
Saturday, July 12, 2008

Senior government officials prepared emergency steps yesterday to rescue troubled mortgage giants Fannie Mae and Freddie Mac but stopped short after a campaign of public statements eased immediate concerns about the stability of the institutions.

But federal regulators were forced yesterday to seize California-based IndyMac Bancorp after a run by depositors led to the second-largest failure ever of a U.S. financial institution. The bank, which was taken over by the Federal Deposit Insurance Corp., became the first major bank to shutter its doors since the savings and loan crisis of the early 1990s. One of the country's largest home lenders, IndyMac saw its holdings battered by the downturn in the housing market.

Similar troubles have buffeted Fannie Mae and Freddie Mac as anxiety has risen about whether the companies have enough capital to cover their mounting obligations because of troubled mortgages. With the companies' stock value draining away in recent days, Treasury Department and Federal Reserve officials have been discussing several dramatic options, including allowing the companies to swap some of their holdings in troubled securities for public money as well as accessing government loans, according to government officials and others informed about the measures. Fannie Mae and Freddie Mac might also be allowed to tap an expanded line of credit from the Treasury.

Such actions would be the first explicit statement by the government that it stands behind the two companies, though investors have long considered a federal guarantee to be implicit. That recognition alone could prove more valuable than the cash.

Some of the measures being considered bear a striking resemblance to the lifeline federal regulators extended to Wall Street's biggest banks earlier this year in an effort to head off a global financial crisis and underscore the peril posed by the potential failure of either Fannie Mae or Freddie Mac.

The Treasury has been developing contingency plans along these lines since at least 2006 but has done far more extensive work -- and with more urgency -- in the past two weeks as Fannie Mae and Freddie Mac's problems have deepened.

These steps are an effort to prevent a full federal government takeover of the companies, which could occur if they are deemed insolvent. Such an arrangement, called conservatorship, would mean that taxpayers would have to cover the potentially tremendous losses on any mortgages the companies own or guarantee.

In recent months, Fannie Mae and Freddie Mac's role in underpinning the housing market has grown as other financial institutions have fled the credit markets. The companies, chartered by the federal government to keep funds flowing to mortgage lenders, pool mortgages into securities for sale to investors. Fannie Mae and Freddie Mac pledge they will cover the payments if borrowers default, and they also buy and hold their own mortgage investments.

Together, they bought about two-thirds of the single-family-home mortgages that originated from January to March of this year, according to their regulator, the Office Federal Housing Enterprise Oversight.

But the companies face questions from investors about whether they have enough capital to cover their obligations, and a loss of faith in them could make it impossible to raise more money.

Yesterday morning, the share prices of both companies fell by about 50 percent, with Freddie Mac trading at $3.89 at one point. After all the public statements, however, the shares of both companies regained some of the lost ground. Freddie Mac finished the day down 3.1 percent, and Fannie Mae was off 22.4 percent.

Freddie Mac's stocks have now tumbled 88 percent since their high in 2006, and Fannie Mae shares are off 85 percent since their recent peak last year.

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