Mortgage giants in government takeover

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

The two companies own or guarantee nearly half of the $12 trillion in U.S. mortgages, but investors' confidence has been shaken by their losses amid rising mortgage delinquencies nationally. In the past year, their share prices have fallen about 90%.

Fannie and Freddie will be placed in a government conservatorship that will assume the powers of their boards and management, said James Lockhart, head of the Federal Housing Finance Agency, which regulates Fannie and Freddie.

The government could invest as much as $100 billion in each of the companies over an indefinite period so their liabilities did not exceed assets. It 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.

The government will offer secured financing to both companies, and it will launch a temporary program to buy their mortgage-backed securities.

But another part of the rescue plan deals a blow to investors. Although the companies' common and preferred shares will remain outstanding, more than $2 billion a year in dividends will be eliminated. Many large banks and other U.S. institutions, as well as foreign investors, hold those shares.

Because the government's claim on the companies' assets and any profits supersedes that of other investors, Standard & Poor's and Fitch Ratings cut their ratings on the preferred shares to a high-risk "junk" grade Sunday.

"There are tons of individuals who own the preferred stock," said Marilyn Cohen, CEO of Envision Capital. "They are going to wake up in the morning and be stunned. The opening will be a bloodbath."

Fannie and Freddie buy mortgages from banks and rebundle them into securities for sale to investors.