Taxpayers take on trillions in risk

The unprecedented federal takeover of mortgage giants Freddie Mac and Fannie Mae announced on Sunday is a bold attempt to stabilize financial markets and restore the faltering housing market, but it thrusts trillions of dollars of risk directly onto taxpayers' shoulders.

"You can call it a bailout, you can call it a safety net or you can call it a rescue package, but the bottom line is the American taxpayer is left footing the bill," says Richard Yamarone, director of economic research at Argus Research.

At a Sunday morning news conference, Treasury Secretary Henry Paulson and James Lockhart, director of the newly formed Federal Housing Finance Agency (FHFA), announced that Fannie Mae, fnm based in Washington, D.C., and Freddie Mac, fre based in McLean, Va., will begin operating immediately under a federal government conservatorship. Unlike a receivership, the arrangement leaves hope for shareholders that investments may regain some value. President Bush signed housing legislation in July that gives the government clear authority to intervene as it has.

If the plan settles the bond market as government officials hope, borrowers may find mortgages at slightly lower rates than otherwise. In taking over the companies, the government ousted their CEOs, but otherwise, work continues as normal.

Though the companies haven't been at imminent risk of collapse, deep losses from the housing meltdown have raised concerns from investors around the world about their ability to meet financial commitments.

"I have determined that the companies cannot continue to operate safely and soundly and fulfill their critical public missions without significant action to address our concerns," Lockhart says.

Freddie Mac and Fannie Mae combined own or guarantee $5.4 trillion in outstanding mortgage debt. The government's decision to place both agencies into a conservatorship — in essence, taking on responsibility for that debt by wresting control from the government-chartered corporations — is a historic move.

It is still uncertain how much capital the agencies may need from the government. What that means to taxpayers ultimately depends on what happens with the faltering housing market. To the extent homeowners continue to make timely mortgage payments, pressure on the government is lessened. Continued foreclosures and troubles in the mortgage market could carry an expensive tab.

The Mortgage Bankers Association reported Friday that more than 4 million homeowners, or 9% of those with mortgages, were delinquent by at least one payment or in foreclosure at the end of June. It's the highest rate ever, the MBA says.

Terms of the government takeover call for drastically reducing, over time, the roles that Freddie Mac and Fannie Mae play in the mortgage market. Government officials say the duration of the conservatorship is indefinite, and Paulson said policymakers need to use the time to decide whether the role of the companies is best played by private corporations, the government, or hybrids such as Fannie Mae or Freddie Mac.

Paulson and Lockhart unveiled a four-part plan to come to the aid of the agencies, which have sustained combined losses of $14 billion in the past four quarters.

Key elements of the plan:

•Government purchase of mortgage-backed securities. Initially, the government will spend $5 billion to buy the securities, to demonstrate Treasury support for continued mortgage availability.

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