Between them, ""Fannie Mae"":http://www.fanniemae.com and ""Freddie Mac"":http://www.freddiemac.com own $5.4 trillion of the nation's $12 trillion in residential mortgage debt.
As part of the ""federal government's takeover"":http://dsnews.comview_story.cfmxid=2851 of the two government-sponsored enterprises (GSEs), the ""U.S. Treasury"":http://www.treasury.gov plans to purchase $5 billion of Fannie Mae and Freddie Mac mortgage-backed securities (MBS) within the next month. This will be the first taxpayer shell-out under the new conservatorship, according to senior government officials. In his address on Sunday announcing the GSE buy-out, ""Treasury Secretary Henry Paulson"":http://www.treasury.gov/initiatives/sec-corner/ pledged that additional MBS purchases would be made as deemed appropriate, from now until December 2009.
The Treasury has put a cap on the expansion of the two entities through the end of 2009 at $144 billion above their total combined assets as of July 31, 2008. The companies are required to trim their total assets by 10 percent per year thereafter, with the objective of ""eventually stabilizing at a lower, less risky size,"" Paulson said.
The Treasury will receive warrants representing a 79.9 percent ownership stake in each company, and this week, the Treasury Department is to receive $1 billion of a new class of senior preferred stock from each of the two enterprises as ""compensation"" for the support and backing they plan to provide.
The Treasury also plans automatic preferred stock purchases, triggered when the companies' quarterly financial reports show assets dipping below liabilities. The Department has put a limit of $100 billion per institution on this quarterly purchase - a figure chosen ""to provide market stability,"" Paulson explained.
In order to conserve over $2 billion in capital every year, the firm's common stock and preferred stock dividends will be eliminated, but the common and all preferred stocks will remain outstanding. Subordinated debt interest and principal payments will continue to be made.
U.S. stock markets rallied yesterday following the news of the takeover, with all the major indices showing gains. Even the exchanges in Europe and Asia were boosted by the promising outlook of a more stable U.S. financial market. Shares of Fannie and Freddie, on the other hand, took a tumble. Fannie Mae's (NYSE: FNM) stock slipped 83 percent to 88 cents in trading yesterday, while Freddie Mac (NYSE: FRE) fell 90 percent to 73 cents.
Mortgage rates fell yesterday, shortly after the market opened. According to ""BankRate.com"":http://www.bankrate.com, the national average on a 30-year fixed-rate mortgage dropped to 6.2 percent, from 6.55 percent last week.
Paulson sold the idea of the GSE rescue plan to Congress by promising, ""Give me a blank check, and I won't have to write it."" The question now is: how big is that subsidized check going to getx