Financial Regulatory Forum

U.S. considers “bad bank” split of Fannie Mae, Freddie Mac – report

By Reuters Staff
August 6, 2009

WASHINGTON, Aug 5 (Reuters) – The Obama administration is considering splitting Fannie Mae and Freddie Mac and putting their troubled assets in a new federally backed corporation, The Washington Post reported on Wednesday, citing administration officials.

According to the newspaper, the administration launched a broad government effort this week to overhaul the mortgage finance companies, the two largest sources of U.S. housing finance.

The move would dispense with one of the biggest burdens created by the financial crisis: the hundreds of billions of dollars in money-losing home loans owned by Fannie Mae and Freddie Mac, the article said.

The companies’ regulator, James Lockhart, director of the Federal Housing Finance Agency, confirmed that the administration is discussing the “good bank bad bank” model and that the discussion was in an early stage, the Post reported.

The proposal has appeared in several internal papers on the topic and appeared as part of an agenda for a meeting on Thursday hosted by the White House’s National Economic Council, the newspaper said.

President Barack Obama’s budget proposal for 2010 tallies up the federal aid granted to Fannie Mae and Freddie Mac but does not bring those mortgage-finance companies’ obligations fully onto federal books.

In September, Fannie Mae and Freddie Mac were effectively nationalized when the government promised to buy up to $100 billion preferred shares in each company and created warrants to severely dilute existing shareholders.

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