By Jessica Holzer from the Wall Street Journal -- The regulator of Fannie Mae and Freddie Mac told lawmakers Thursday that the federal government seized control of the mortgage giants after they said they wouldn't be able to raise more capital without financing from the U.S. Treasury.
Federal Housing Finance Agency Director James B. Lockhart painted a stark picture of the pressures mounting on the government-sponsored enterprises in the weeks before the government took them over. He argued that by August, the firms had only one other option: shedding their mortgage assets as the housing market was tanking.
"That would have been disastrous for the mortgage markets, as mortgage rates would have continued to move higher and, in turn, disastrous for the enterprises as the prices of their securities would have fallen and credit losses increased," Mr. Lockhart told members of the House Financial Services Committee.
He said the firms' deteriorating financial positions, coupled with the worsening housing and capital-market conditions, led him to act jointly with the Treasury to seize the firms on Sept. 7.
Mr. Lockhart said that by August, the firms' borrowing costs were climbing higher and it became clear the firms wouldn't be able to raise capital in any "meaningful size." Meanwhile, central banks had stopped buying their securities, while ratings firms had notched down their ratings on all but the companies senior debt.
These factors "convinced us that the time to act was now," he said.
The new chief executives for Fannie and Freddie, Herb Allison and David Moffett, also testified at the hearing, which was marked by finger-pointing by lawmakers on which party was to blame for the takeover of the firms.
Republicans argued that Democrats stalled legislation to tighten oversight of the firms. Failure to pass such legislation is "one of Washington's greatest oversights" in years, said Rep. Ed Royce, a California Republican.
Messrs. Allison and Moffett told lawmakers that they were in close communication with federal regulators and the Treasury to perform the firms' public mission while nursing them back to health.
"We are mindful that we need to operate in a safe and sound manner and we need to move quickly to perform our role as a core stabilizing factor in the markets," Mr. Allison said.
Mr. Moffett said that, in addition to pumping liquidity into the mortgage market, Freddie Mac "remains focused on meeting our affordable housing mission, including the affordable housing goals."
However, Mr. Lockhart said the firms missed two affordable housing targets set by the Department of Housing and Urban Development in 2007. Based on his discussions with the firms, "the miss will be larger in 2008," he said.
Mr. Lockhart recounted a series of steps taken in conjunction with the government takeover and in the weeks after, including halting all lobbying by the firms, hiring Messrs. Allison and Moffett and recruiting two nonexecutive chairman of the firms' boards. Philip Laskawy agreed to fill the role at Fannie, while John Koskinen took the job at Freddie.
Mr. Lockhart said FHFA didn't take lightly its decision to seize the firms, and that the agency had consulted with Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson beforehand.
During the regulator's review of the companies early in July, it became clear that conditions were worsening faster than either firm had anticipated. By early August, there were "significant and critical weaknesses across the board" in terms of credit, market and operational risk, Mr. Lockhart said.
The goal of taking control of the two firms is "to help restore confidence in Fannie Mae and Freddie Mac, enhance their capacity to fulfill their mission, reduce the systemic risk and make more mortgages available at a lower cost to the American people," he said.
Write to Jessica Holzer at jessica.holzer@dowjones.com
