Paulson: No Bailout for Fannie Mae, Freddie Mac

There had been reports that the government was considering a plan to take over one or both of the nation’s major mortgage finance agencies, placing them in a conservatorship, which would wipe out shareholders and obligate taxpayers to cover losses on home loans that Fannie and Freddie own or guarantee.

Paulson, whose comments came as shares of the so-called government-sponsored enterprises tumbled to their lowest levels in 17 years, said his department is “maintaining a dialogue with regulators and with the companies.”

Investors seemed unimpressed by the Treasury secretary’s statement, as stocks tumbled and oil prices climbed further into record territory. The Dow Jones industrials fell more than 180 points and dropped below the 11,000 mark in mid-day trading for the first time in two years.

Meantime, a barrel of oil vaulted to another record above $147, raising more concerns about the impact of higher prices on inflation and in turn, the overall economy.

Fannie Mae and Freddie Mac — the nicknames for the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp., respectively — hold or guarantee around $5 trillion worth of mortgages, or roughly half of the $9.5 trillion debt of the United States. Their shares have slumped this year on concern the firms don’t have enough capital to offset losses from the mortgage meltdown.

Were Fannie and Freddie unable to borrow or find it too costly to borrow, they would not be able to buy mortgages from lenders. This would make it far more difficult, and perhaps impossible, for people to obtain home loans.

“Although there is some danger here that Fannie and Freddie may become insolvent, I think it’s very, very remote unless for some reason the credit markets lose confidence in the willingness of the U.S. government to stand behind them,” Peter Wallison, former general counsel at the U.S. Treasury, told Bloomberg Radio. “It’s impossible to imagine such a thing happening.”

Congress created the companies to provide a steady stream of money for home mortgages. Although the government doesn’t guarantee Fannie’s and Freddie’s debts, most investors believe the government would come to their rescue if the companies fell into dire straits. This “implicit” guarantee allows them to borrow money at lower interest rates than other financial companies.