Candidates briefed on Fannie, Freddie bailout

WASHINGTON — The housing crisis took center stage on the presidential campaign trail Saturday after the Treasury Department confirmed to the candidates it was preparing a historic seizure of mortgage-finance companies Fannie Mae and Freddie Mac.

In Terre Haute, Ind., Democrat Barack Obama welcomed the move, saying the two entities had sought profits over the stability of their own companies, which are vital to U.S. mortgage lending.

"The management was not making decisions that were designed to help them meet what should have been the mission," he said. "They were boosting profits as a priority, with the management bonuses that came with those priorities."

Treasury Secretary Henry Paulson briefed Obama late Friday on plans to seize, perhaps this weekend, Fannie Mae and Freddie Mac in an effort to bolster the pair and calm jittery global financial markets.

Foreclosure woes

Investors have reason to be jittery. On Friday, the Mortgage Bankers Association said more than 4 million U.S. homeowners with a mortgage, a record 9 percent, were either behind on payments or in foreclosure at the end of June.

Also Friday, Nevada regulators shut down Silver State Bank, the 11th failure this year of a federally insured bank. In July, regulators seized IndyMac, which had $19 billion in deposits. Earlier this year, the government orchestrated the takeover of investment bank Bear Stearns by JPMorgan Chase.

Paulson told Republican John McCain that Fannie and Freddie — which purchase mortgages from banks and package them into popular bonds — would be seized and placed under temporary control in one of the largest government bailouts ever. The move is expected before Asian markets open Monday.

McCain's campaign Saturday called for the eventual elimination of Fannie and Freddie, complaining they have become so large and poorly managed that they pose a risk to the broader markets.

Help promised

McCain "will get real regulation that limits their ability to borrow, shrinks their size until they are no longer a threat to our economy, and privatizes and eliminates their links to the government," said Doug Holtz-Eakin, a McCain adviser.

Obama, too, has been critical, complaining that Fannie and Freddie should either operate as public entities without profit or as private companies that won't be rescued.

McCain's running mate, Alaska Gov. Sarah Palin, speaking in Colorado Springs, Colo., said Fannie and Freddie had "gotten too big and too expensive to the taxpayers." The companies, however, aren't taxpayer-funded. The takeover may result in a taxpayer bailout during reorganization.

As explained to the campaigns, Fannie and Freddie would be placed under the control of their regulator, the new Federal Housing Finance Agency. This agency was created when President Bush signed legislation July 30 replacing the previous regulator of Fannie and Freddie, the Office of Federal Housing Enterprise Oversight.

It appears that investors who own the companies' common stock will be virtually wiped out; preferred shareholders, who have priority over other shareholders, also may end up with little. Holders of debt, including many foreign central banks, are expected to receive government backing.

The cost of the government's intervention could rise into tens of billions of dollars and probably will be among the most expensive rescues financed by taxpayers.

Treasury officials hope the takeover will stabilize credit markets, give banks incentive to do more mortgage lending and bring down mortgage rates by reducing the gap between mortgage rates and longer-term Treasury bonds.

The takeover also was confirmed Saturday by Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee. Frank said he spoke late Friday with Paulson and was told that Treasury "intends to use the powers that Congress provided it to ensure the continued and stable functioning of Fannie Mae and Freddie Mac."

$15 billion lost so far

Fannie and Freddie are huge; together they own or back more than half of U.S. mortgage debt — more than $5.2 trillion worth — and the two have lost almost $15 billion this year while their shares have lost more than 90 percent of their value.

The two lenders securitize home loans, which means they buy mortgages from banks and other lenders, pool them and sell them as bonds. These bonds traditionally have been viewed as safe and were snapped up by big U.S. commercial banks, foreign central banks and foreign and domestic investment funds.

But the two-year slump in the U.S. housing market has tarnished anything associated with home finance, and investors have clamored for more explicit backing of Fannie and Freddie. In July, Paulson said he did not expect to intervene with Fannie and Freddie.

Information from The Associated Press and The New York Times is included in this report.