The Federal Reserve is expected to announce Tuesday it will begin the process of filing for bankruptcy protection for two of the country’s biggest banks, Fannie and Freddie, in what could be the first step towards a government takeover.
Fannie, the nation’s largest mortgage lender, filed for Chapter 11 bankruptcy protection on Feb. 17, just two weeks after it announced a massive $US6.2 billion bailout.
Freddie, which has been on the brink of insolvency for months, filed last month for Chapter 9 bankruptcy protection.
The Fed is expected on Tuesday to announce that it will start the process, with the goal of filing by the end of March.
In a statement to reporters, the Fed said that it was also filing for Chapter 7 bankruptcy protection, with its assets frozen and its assets valued at about $US9 billion, including $US5 billion in cash.
But the Fed did not reveal what assets were frozen and how much cash was in its vault.
The central bank’s decision could lead to higher rates for Fannie’s home mortgage lending customers, whose payments will be capped.
The financial crisis hit Fannie hard and triggered the massive bailouts of the mortgage giants, which also have vast pension funds that they use to pay employees.
Fidelity, the largest bondholder for Fanny Mae, is the largest shareholder in Freddie Mac, which was also hit hard by the financial crisis.
The two lenders have a combined $US1.3 trillion in assets.
But as the crisis has deepened, Fidelity has also become increasingly conservative and has taken steps to reduce its exposure to Fannie.
Fitch Ratings, which downgraded Fannie last week, has said that Fannie has a $US800 billion risk-weighted asset base, and that Fidelity is unlikely to be able to sell more assets.
Fortunes could be lost for both banks if the government does not come to their rescue.
Failing Fannie Fannie may be a victim of its own success, said Jeff Riedel, head of credit research at Moody’s Analytics.
“I think they’re going to be a little bit lucky that they haven’t gone under,” Mr Riedels told CNBC.
“But they’re still a major bank, and they’re a very, very large bank.”
The US Federal Reserve has said it is likely to extend its $US200 billion bailout for FHFA to March 1, while the Fed will also provide another $US30 billion to cover its remaining $US150 billion in loan losses.
The Federal Deposit Insurance Corporation has already provided another $80 billion to FHSA, but a US Senate report earlier this month revealed the bank may be able offer another $100 billion to help Fannie if it is forced to file for bankruptcy.
FHRA is not alone in being in trouble.
Other financial institutions are facing financial pressures.
In February, Goldman Sachs Group Inc was forced to halt some of its $1.4 trillion in operations, including the $US8 billion it received from the Federal Reserve to buy mortgage-backed securities.
Goldman is also a major player in the mortgage market, with some $US4.6 trillion in loans, according to the US Department of Housing and Urban Development.
FHA is also struggling, with losses from the housing market at $US2.9 trillion, according the government.
The US Treasury Department last week estimated that FHDA lost $US400 billion in the first quarter, while other lenders have seen losses of up to $US500 billion.
The fallout from the crisis is expected, too.
FHSAs main lender has said losses of $US700 billion in Q1 from the financial sector.
FASB, the Federal Financial Stability Board, has warned of a “significant increase in losses” from the fallout of the crisis.
But experts have said that while the fallout from Fannie/Freddie may be significant, the banks will ultimately have to recover some of the losses, because they are the ones that took on the debt.
“The big question is whether or not the banks can absorb it and survive in a financially unstable environment, and I think that’s going to depend on how much they pay out,” Mr Rees said.
FHCI will also need to do more to help its borrowers.
FHB is facing $US3 billion in write-offs, including from the $30 billion that FHA had to pay for the bailout.
The banks will also be responsible for providing $US300 million in loan forgiveness to borrowers who have made less than $US100,000 a year in income.
FHLP, which is the government-owned lender for FHA, has also announced it will provide another billion dollars in aid to FHB, which will be repaid by FHCIs $US10 billion bailout fund.
The Government’s Financial Stability Fund, which provides assistance to banks in