By Patrick Rucker
WASHINGTON (Reuters) - The chief regulator for Fannie Mae and Freddie Mac said on Thursday he had no option but to seize control of the two mortgage finance companies in early September because they had grown so unstable.
James Lockhart, director of the Federal Housing Finance Agency, told lawmakers that he had found "significant and critical weaknesses across the board" by August when the government was mulling how it might stabilize the companies, which are critical to the U.S. housing market.
In early September, policy-makers asserted their right to seize the two companies that were conceived by Washington to make homeownership more affordable.
Over the previous few weeks, investors had turned their backs on the two companies because of fears that they might not have enough capital to weather the housing downturn and that a government takeover was imminent.
"Each company reported to the FHFA and to Treasury that it was unable to access capital markets to bolster its capital position without Treasury financing," Lockhart said in prepared remarks to the House Financial Services Committee, referring to the companies' regulator and the U.S. Treasury Department.
Lockhart said that now, with explicit government backing, the two companies are better able to help the housing market.
ACCESS TO BAILOUT DOLLARS
Deepening anxiety about the housing market and soured mortgage investments have damaged global credit markets in recent weeks. Lawmakers are now hammering out details of a rescue plan that would see Washington buy up to $700 billion in troubled assets.
Lockhart said that Fannie Mae and Freddie Mac may choose to shed some of their mortgage securities under that plan.
"In theory, some of their securities could be purchased as part of this program," Lockhart said. "They will have the ability, like other people, to participate."
The chief executives now at the helm of each firm also testified that they might take advantage of the government program as they try to rebuild their balance sheets while under government stewardship.
"I think this rebuilding period during conservatorship will yield good results," said David Moffett, the new CEO of Freddie Mac. "During this time of conservatorship, I think it will make a big difference to regain that confidence and regain both the public and employees' view of Freddie Mac."
Moffett and Herbert Allison, the chief of Fannie Mae, agreed that their first priority is to get the companies on firm financial footing. Once that process is through, Moffett said, policy-makers will have to decide the long-term fate of the companies and whether Washington should snip the existing government ties.
"Once (the companies) get through this conservatorship, I think that does need reexamination," Moffett said.
When asked what would be fair compensation for the chief executives of Fannie Mae and Freddie Mac, Lockhart said the current chiefs should receive compensation somewhat in line with the heads of other financial services companies.
"I would expect to pay them over a million dollars a year," Lockhart said.
Preferred shares of Fannie Mae and Freddie Mac are widely held by banks, and several lawmakers asked if dividends on those shares could be resumed.
Lockhart and the company chiefs agreed, however, that there was little chance of those dividends being resumed in the short term because the battered companies needed to conserve capital.
(Editing by Leslie Adler)