U.S. Government takes over Fannie Mae & Freddie Mac

Today, the US Treasury took control of home mortgage giants Fannie Mae & Freddie Mac. This is the latest fallout from the ongoing housing and mortgage crisis facing the nation and slowing the economy. According to Henry Paulson, US Secretary of the Treasury, it was a necessary step to keep these companies from failing and stabilizing the beleaguered secondary mortgage market.

Under this government takeover, the companies will be run by the government and their CEOs will be replaced Monday. They will be placed under conservatorship – which means they will run as independent companies under the supervision of the Federal Home Finance Agency (FHFA).

James Lockhart, the head of the FHFA, said, “As house prices, earnings and capital have continued to deteriorate, Fannie and Freddie's ability to fulfill their mission has deteriorated. In particular, the capacity of their capital to absorb further losses while supporting new business activity is in doubt.”




In addition, an audit of Fannie Mae & Freddie Mac conducted by Morgan Stanley was ordered by Paulson. Apparently, this audit has revealed very troubling information that led Paulson to believe that this was the only option to save these companies and prevent and even larger crisis in the national and global credit markets. Paulson characterized this action as a “time out” that should help these companies to stabilize.

Parts of the plan call for Fannie Mae & Freddie Mac to actually increase their mortgage holdings in the short term to help further stabilize the mortgage and housing markets. In the long term, though, they will have to reduce their holdings in order to minimize future risk for the companies. Congress will ultimately have to decide the future of these companies.

Federal Reserve Chairman Ben Bernanke said that he fully supported the government takeover. "These necessary steps will help to strengthen the U.S. housing market and promote stability in our financial markets," Bernanke said.

Although this all seems like horrible news for the mortgage and housing markets (as well as the broader economy) there are some positives to this move. First, this prevents the failure of the mortgage giants and possible the entire mortgage system as we know it. Second, with the government guaranteeing the debt of Fannie and Freddie, many people believe we could actually see rates go down and mortgage become easier to get. Bother of these could help to end the housing crisis and downward spiraling home values across the nation.

We will learn more as the markets open Monday and I will provide updates as I learn more.