Saying that market conditions have made it impossible for the nation's top mortgage lenders to sustain its loans, the Treasury Department announced Sunday the government is seizing Fannie Mae and Freddie Mac.
The quasi-government agencies' executives have been ousted and the loans will be managed by the Federal Housing Finance Agency.
The move is intended to prevent major financial turmoil, Treasury Secretary Henry Paulson said in a press conference.
"I have long said that the housing correction poses the biggest risk to our economy. It is a drag on our economic growth, and at the heart of the turmoil and stress for our financial markets and financial institutions," Paulson said. "Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner on housing."
Over the summer, Congress granted the Treasury Department authority to bulk up the congressionally-mandated agencies either through the purchase of stock or equity lending or by taking control of operations until the companies' finances were steady. Treasury will buy the companies' preferred stock and purchase its debt off the open market.
Putting the government-sponsored enterprises into conservatorship is a means to prevent the lenders from going bankrupt, Paulson said, pledging that when the takeover ends, the companies will begin to pay back the government as a means to compensate taxpayers who will be footing the billions it will cost for the bailout.
Freddie and Fannie are responsible for about $5 trillion in home loans in the U.S. Paulson said the agencies will be allowed to slightly increase their portfolios next year but in 2010 will start reducing the number of its loans.
Speaking later in the day, President Bush said the takeover is necessary because of the "unacceptable risk" that would be taken by letting them operate on their own.
In a statement, the president called the moves temporary. He said putting the companies on sound footing is "critical to the health of our financial system." The housing giants "cannot continue to operate safely and soundly," he said.
Paulson agreed that despite the cost to taxpayers, the takeover was unavoidable.
"Let me make clear what today’s actions mean for Americans and their families," Paulson said. "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. This turmoil would directly and negatively impact household wealth: from family budgets, to home values, to savings for college and retirement.
"A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance. And a failure would be harmful to economic growth and job creation," he continued.
Paulson said it will be up to the next Congress and administration to decide what role these agencies should play and how much risk they should be permitted to assume, given their status as congressionally-chartered companies.
Paulson said he spoke with several members of Congress and others before Treasury decided to take this role. He received the backing of Federal Reserve Chairman Ben Bernanke.
Federal Reserve Board Chairman Ben S. Bernanke:
"I strongly endorse" the conservatorship and other actions taken Sunday," Bernanke said in a statement. "These necessary steps will help to strengthen the U.S. housing market and promote stability in our financial markets."