U.S. to take over mortgage giants Fannie Mae, Freddie Mac

WASHINGTON -- Federal officials announced Sunday they will take control of beleaguered mortgage giants Fannie Mae and Freddie Mac in the government's most aggressive move yet to rescue a financial industry reeling from a year-old mortgage and credit crisis.

James Lockhart, head of the Federal Housing Finance Agency, which regulates Fannie and Freddie, said his agency is placing the companies in a temporary government-supervised conservatorship and will assume the powers of the companies' boards and management.

Under the government's plan, it will offer secured financing to both companies. It will also launch a temporary program to buy the two companies' securities that are backed by mortgages they've purchased. Those securities have grown riskier as mortgage foreclosures and delinquencies have risen.

The government will immediately receive $1 billion of senior preferred stock in each company as well as rights to buy common shares equal to a 79.9% stake in each company. Fannie and Freddie also will pay the government quarterly fees starting in March 2010.

Lockhart said the two companies will be allowed to grow their portfolios of mortgage-backed securities without limits and continue to buy replacement securities for their portfolios — about $20 billion a month without capital constraints.

Presidnet Bush said a collapse of Fannie Mae and Freddie Mac would pose "unacceptable" risks to the economy.

"Allowing the companies to fail or further deteriorate would damage our home mortgage market, and could weaken other credit markets that are unrelated directly to housing," Bush said in a statement released Sunday.

Fannie and Freddie, which own or guarantee nearly half of the $12 trillion U.S. home mortgage market, buy mortgages from lenders such as banks and rebundle them into securities that are sold to investors. They borrow money to finance those purchases at relatively low interest rates because investors have long assumed the government stood behind their debt.

But their losses have mounted as defaults and foreclosures have increased, and that in turn has led to worries about the riskiness of their debt and their ability to continue raise the capital they need to lubricate the mortgage market.