Too Big to Fail, the Next Step: US Seizes Fannie Mae, Freddie Mac

This is the VOA Special English ECONOMICS REPORT.

This week, the government took control of America's two biggest housing finance companies. Fannie Mae and Freddie Mac are under conservatorship. This process of supervision will continue until the new Federal Housing Finance Agency decides they are back in financial health.

In July, Congress gave the Treasury new powers to save them, using as much money as needed. At first, Treasury Secretary Henry Paulson said he had no plans to use those powers.

But on Sunday he announced that new findings about the condition of the companies forced action. He said a failure of either would shake financial markets at home and around the world.

Fannie Mae and Freddie Mac buy loans from lenders to provide more money for housing finance. They own or guarantee five trillion dollars in debt and securities. They keep some loans but resell others as mortgage-backed securities. These are held by central banks and other investors worldwide.

As the housing and credit crisis deepened, Fannie and Freddie have had trouble raising capital to cover bad loans. The government saw a risk to the financial system.

As part of the rescue, the Treasury plans to buy at least five billion dollars of their mortgage-backed securities. And it plans to buy up to one hundred billion dollars of preferred stock in each company.

The Federal Reserve will also lend money as needed.

Critics say taxpayers could lose a lot. But Treasury officials say the plan should save money in the long term, and might even bring a profit.

Each company will give the Treasury one billion dollars in stock that pays at least ten percent a year. And the Treasury could buy up to eighty percent of their common stock if it chooses. Under the takeover, existing owners of common stock will lose most of their investment.

Mortgage interest rates dropped this week following the takeover. Marc Savitt, president of the National Association of Mortgage Brokers, called it a good sign for the housing market.

Yet Fannie Mae and Freddie Mac still face a conflict between serving a public interest and a private one. Congress created them so more Americans could buy houses. Then Congress made them into shareholder-owned companies.

Some people say, nationalize them. Others say, break them up into new companies without any government support, or sell them to other businesses.

And that's the VOA Special English ECONOMICS REPORT, written by Mario Ritter. I'm Steve Ember.