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Various media reports indicated Saturday that the U.S. Treasury Department is negotiating a plan to take control of the companies, which have been under continuous pressures since the subprime mortgage crisis began playing havoc on the housing and credit markets last year. Precise terms of the bailout have not become public.
While the troubles at Fannie and Freddie have been well known for the past several months, there has been some optimism lately that a government bailout would not be necessary.
As recently as late August, Atlanta Federal Reserve President Dennis Lockhart said that recent developments for the companies have been mostly positive, though he admitted that the situation was fluid.
Shares of Fannie Mae reached a closing low on August 20 and an intraday low on August 21, but bounced back during the next week and a half. Freddie Mac has had a similar trading pattern over the past few weeks.
At around the same time they were setting new lows, Fannie Mae's CEO said that the Treasury Department has not offered to help the company and it hasn't asked for help.
Earlier this summer, President George Bush signed a housing recovery bill that included provisions to bolster Freddie and Fannie. The bill was strongly backed by Treasury Secretary Henry Paulson.
Shortly after the bill was passed, Paulson explained why he thought support for the two companies was important.
"Fannie and Freddie's continued activity is central to the speed with which we emerge from this housing correction and remove the underlying financial market and financial institution uncertainty," he said in a speech given on July 31.
Even though the specifics of the government's planned bailout are still unclear, reactions to the likely bailout have already begun. This includes a response from Democratic presidential candidate Barack Obama, who said that Washington has for too long "ignored the warning signs in the housing and financial markets."
Obama said that he believed that any action must be aimed at strengthening the economy and helping homeowners an not "on the whims of lobbyists and special interests worried about their bonuses and hourly fees." He also said that any plan must "not bail out the shareholders and management of Fannie Mae and Freddie Mac."
Lastly, Obama said that any action must clarify "true public and private status of our housing policies."
In early August, Fannie Mae announced a $2.3 billion loss for its second quarter, as credit costs swelled to $5.3 billion stemming from higher loan loss provisions and charge-offs amid challenging conditions in the housing and mortgage markets. The company also trimmed its quarterly dividend.
Around the same time, Freddie Mac announced a loss of $821 million and also announced a dividend cut.
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