Government seizes Fannie and Freddie
Government seizes Fannie and Freddie
WASHINGTON - The government’s seizure of troubled mortgage giants Fannie Mae and Freddie Mac is potentially a $200 billion bet that it will help reverse a prolonged housing and credit crisis.
Announced Sunday, the move won support from both presidential campaigns, but private analysts worry that it may not be enough to stabilize the slumping housing market.
Officials announced that both giant institutions were being placed in a government conservatorship, a move that could end up costing taxpayers billions of dollars. Analysts said allowing the companies to fail would have extracted a higher price on consumers by driving up the cost of home loans and all other types of borrowing.
Analysts were split on how much the takeover could eventually cost taxpayers although they all agreed the up-front costs will be substantial, possibly hitting $100 billion as the Treasury is called upon to bolster the capital cushions at both institutions.
However, if the plan does the trick of stabilizing the housing market and home prices stop falling and rebound, then the assets of both Fannie and Freddie should rise in value and the government should be able to sell off the companies and recoup its investments.
Futures on all major stock indexes rose about 2 percent in electronic trading Sunday night, another sign of investor relief about the takeover plan.
Fannie and Freddie both purchase home loans from banks and then repackage those loans as mortgage-backed securities which they either hold on their own books or sell to investors around the globe. This process provides banks with more money to make more home loans, greatly expanding home ownership.
The conservatorship will be run by the Federal Housing Finance Agency, the new agency created by Congress this summer to regulate Fannie and Freddie, a move taken at the same time that Congress greatly expanded the power of the Treasury Department to make loans to the two companies and purchase their stock.
