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Just three months after the U.S. government took over Fannie Mae, the biggest source of housing finance may need an infusion of fresh capital to stay in business.  Unfortunately for the American taxpayer, the Treasury may be forced to pump up to $100 billion to stop the company from swinging from the “conservatorship” status it acquired when the government took control of the company and its rival Freddie Mac to a “receivership” situation that would involve selling off assets to pay creditors.  The U.S. Treasury Department stands ready to inject $100 billion into each company to avert receivership. If Fannie Mae or Freddie Mac shut down, mortgage rates would soar, making it enormously difficult for the housing market to climb out of the worst slump since the Great Depression.  “Receivership is really not tenable” because of the importance of Fannie and Freddie to the economy, said Fred Cannon, chief equity strategist at Keefe, Bruyette & Woods in San Francisco.

A Treasury infusion for Fannie Mae and Freddie Mac would boost market confidence in the government’s guarantee. Debt costs would drop and market access should increase, as a result, smoothing the companies’ ability to fund mortgage purchases and help stabilize housing, analysts said.  Conservatorship aims to preserve Fannie Mae’s assets as it works toward restoring health. The company on Monday reported a record $29 billion loss in the third quarter.  “If receivership meant liquidation, that would be the last thing that the U.S. mortgage market needs,” Cannon said, adding that a capital infusion is likely before year end.  FHA home loan products have completely taken over the market–share that Fannie and Freddie once dominated. 

Conservatorship is not a long-term solution, but “I don’t see any reason to push them into receivership prior to Congress addressing the structure of Fannie Mae and Freddie Mac” in the new administration.  The U.S. seized Fannie Mae and its smaller rival Freddie Mac in early September, saying the companies were so battered by the mortgage loan meltdown that they risked being unable to fulfill their mission of aiding housing.  Unfortunately, mortgage refinance loans have become so difficult because so many homeowners have migrated towards foreclosure or a loan modification.  Any of these foreclosure prevention options hurt the mortgage lenders profits. 

Fannie Mae said its regulator, the Federal Housing Finance Agency, must place it into receivership if its assets fall below obligations, or if it has not paid debts, for 60 days.  “We do not know whether we will exist in the same or a similar form or continue to conduct our business as we did before the conservatorship, or whether the conservatorship will end in receivership,” Fannie Mae said.  If worsening housing and financial markets result in a sharp net loss again in the fourth quarter, and Fannie Mae’s assets are worth less than its liabilities at year end, the company said it will have to tap funds from the Treasury to avoid a mandatory receivership trigger under current statute.  “Unlike a conservatorship, the purpose of which is to conserve our assets and return us to a sound and solvent condition, the purpose of receivership is to liquidate our assets and resolve claims against us,” the company noted in its quarterly filing.

Treasury Secretary Henry Paulson has said that conservatorship should be viewed as a “time out” while policymakers decide the companies’ future role and structure.  Fannie Mae and Freddie Mac own or guarantee about half of U.S. mortgage loans.  “They need to be there in some form. I don’t know how you can set up something new to do their job in a reasonable period of time,” said Bill Cheney, president and chief executive of the California and Nevada Credit Union Leagues in Rancho Cucamonga, California.  “Fannie Mae’s problems aren’t so encouraging but I can’t see the government really letting them go away,” he added.  Fannie Mae warned that if it must tap Treasury for cash it will raise its expenses and delay a return to profitability.  Among the risks, Fannie Mae said, is that the Treasury’s funding commitment might not go far enough.  “If we continue to experience substantial losses in future periods or to the extent that we experience a liquidity crisis that prevents us from accessing the unsecured debt markets, this commitment may not be sufficient to keep us in solvent condition or from being placed into receivership,” Fannie Mae said.  > Read complete mortgage article. (Written By Lynn Adler)