Government takes over Fannie and Freddie

9 September 2008

The US Treasury has formally assumed control of troubled mortgage giants Fannie Mae and Freddie Mac, it confirmed yesterday.

Both chief executives of the lenders, which were previously government-sponsored rather than government-owned, have also been replaced.

Explaining the decision to take over, Treasury secretary Henry Paulson suggested that the two lenders were in danger of collapsing due to the ongoing financial effects of the credit crunch, including the freeze of the money markets, falling house prices and rising repossessions numbers.

The economic effects of such a collapse would be catastrophic for the world's largest economy, with the lenders holding around half of the nation's mortgage debt between them.

Under the terms of the new ownership, control will pass in to the hands of the Federal Housing Finance Agency, a new body that was set up over the summer by Congress as the financial troubles at the lenders deepened.

"Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe," Mr Poulsen added.

"A failure would [also] affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance."

Around nine per cent of US homeowners are thought to be behind on their mortgage payments.

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