Fannie, Freddie takeover a pre-emptive strike

By David Lawder - Analysis

WASHINGTON (Reuters) - The U.S. Treasury has been worrying and wrangling over Fannie Mae's and Freddie Mac's capital levels and systemic risks for years. So why move now to seize control of the two troubled mortgage finance giants?

Mounting credit losses, waning foreign appetite for the institutions' mortgage-backed securities and a sobering review by Morgan Stanley prompted Treasury Secretary Henry Paulson to launch what may become the most costly bailout in U.S. history.

"Rather than waiting until a triggering event -- but seeing one on the horizon -- they decided to strike preemptively," said Bert Ely, a longtime banking industry consultant in Alexandria, Virginia.

"They lined up the evidence to present this to the Fannie and Freddie boards before their hand was forced like it was with Bear Stearns," he added.

At the crux of the matter is housing and the economy. With mortgage default rates rising, markets have been losing confidence in the viability of Fannie Mae and Freddie Mac, government-sponsored enterprises that buy mortgages from lenders and hold them or securitize and sell them on to investors.

As demand for their paper diminishes, the cost of mortgages rises, putting more pressure on the already battered housing market.

"He (Paulson) has got to fix housing. Fixing the GSEs is critical to fixing housing. He has to do it before he leaves office," said Michael Youngblood, principal of Five Bridges Capital LLC in Bethesda, Maryland.

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