Fannie Mae & Freddie Mac takeover

Last week Barons as well as The New York Times reported that the 2 GSEs were under considerable pressure to bring in additional capital. In just last week, total losses in value for Fannie Mae was 45% & 30% for Freddie Mac & both have reported $11 billion in losses in the last couple of months. The New York Times reported that if their problems continued Bush administration was taking into consideration plans of their take over and placing them in a conservatorship.

If any of them is placed in conservatorship, its stock value will be next to nothing and the losses on mortgage loans they guarantee or own will be paid by taxpayers. Right now both companies guarantee or own $5 trillion of debt and about one-half of all residential mortgage loans.

The 2 GSEs are facing difficult situation. If they go for new stock issue for raising capital, they would be diluting shareholder's equity. Right now borrowing costs for both of them have increased as their viability is being reevaluated by debt markets.

Regarding conservatorship, any of the 2 GSEs can be placed into conservatorship if their regulator which is Office of Federal Housing Enterprise Oversight (OFHEO) finds that the GSE is ctitically undercapitalized.