As financial stocks enjoyed a broad rally Monday morning, shares of Fannie Mae and Freddie Mac plummeted.
Yesterday morning, the Treasury formally announced the takeover of the two ailing mortgage giants, effectively wiping out common shareholders (and preferred) in the process.
Under the terms of the takeover, the Treasury has enacted a four-part plan aimed at aiding the mortgage market and slowly easing Fannie and Freddie back into more modest positions.
Over the next 15 months, the GSEs will actually ramp up their MBS portfolios, but come 2010, the pair will reduce inventory through natural run-off at a rate of 10 percent per year.
Treasury and Federal Housing Finance Agency (FHFA, the new independent regulator) have also established Preferred Stock Purchase Agreements to ensure the pair has a positive net worth, and to support mortgage availability and confidence in GSE mortgage-backed securities.
Of course common and preferred shareholders will bear any losses ahead of the new senior shares offered by the government.
The Treasury has also established a secured lending facility for the GSEs and the Federal Home Loan Banks, which will expire in December 2009.
Lastly, the Treasury will initiate a temporary program to purchase GSE MBS, which should lower interest rates fairly significantly and boost affordability for struggling homeowners.
Departing Fannie and Freddie CEOs Daniel Mudd and Dick Syron will stay on for a period of time to assist with the transition.
“Because the GSEs are in conservatorship, they will no longer be managed with a strategy to maximize common shareholder returns, a strategy which historically encouraged risk-taking,” said Jim Lockhart, director of the FHFA, in a statement.
“The Preferred Stock Purchase Agreements minimize current cash outlays, and give taxpayers a large stake in the future value of these entities. In the end, the ultimate cost to the taxpayer will depend on the business results of the GSEs going forward.”
“To that end, the steps we have taken to support the GSE debt and to support the mortgage market will together improve the housing market, the US economy and the GSEs’ business outlook.”
Freddie Mac fell $3.79, or $74.31%, to $1.35, while Fannie fell $5.72, or 81.25%, to $1.32 in early trading today.