Government Take Over of Fannie Mae and Freddie Mac

Date: 9/8/08

The government's historic bailout of Fannie Mae and Freddie Mac, announced on Sunday, September 7th, has placed Fannie and Freddie into a conservatorship.  This move is calculated to increase investor confidence - essentially, the government is promising investors that the companies' debt is as secure as the Treasury Department's.  The two companies combined own or guarantee about $5.3 trillion in home loans, which represents about half of all outstanding U.S. mortgages.

FHFA has replaced Fannie CEO Daniel Mudd with Herb Allison, former vice chairman at Merril Lynch & Co., and replaced Freddie chairman and CEO Richard Syron with David Moffett, former vice chairman at US Bancorp.  Both Mudd and Syron will stay on in transitional roles.

Industry observers claim that while this will not cure the problems of the past, it will help the mortgage industry going forward, by shoring up investor confidence and stabilizing the market.  Ideally, it will also help lower interest rates, which will in turn draw potential buyers into purchasing, causing housing prices to increase.

Most brokers do not think that Fannie and Freddie's lending standards will change under the conservatorship.  Before being bought out, the companies had already tightened their requirements substantially, making it harder for borrowers with questionable credit to qualify for a loan.

The way this will all play out remains to be seen. While most speculators believe this is a turn in the right direction, naysayers believe that taxpayer's money is being dumped into unproductive parts of the economy.