Federal Control of Fannie Mae and Freddie Mac

Published by julia | Filed under Buyer / Seller Tips, Miscellaneous, Real Estate, Shout Outs

On September 7, 2008, the federal government took control of both Fannie Mae and Freddie Mac in an effort to keep the companies from failing completely.  Had the companies failed completely it would have made it much more difficult for buyers to obtain loans and would have turned the housing slump into a true crisis.

This government control means that the government, and therefore the taxpayers, will now assume the trillions of dollars of debt the companies currently owe.  In addition to the current debt the government is planning to inject billions of dollars into the companies.  This is the most drastic step the government has thus far taken in response to the housing slump.

The government chose to take this action because failure to do so would have ultimately been worse for the economy and tax payers in general.  The companies are so intertwined with the American financial system that their failure would have been devastating not only to the citizens of the United States but potentially to citizens around the globe.

Experts agree that this move will make the weak housing market stronger which will benefit the overall economy.  It should be easier for buyers to obtain mortgages and those mortgages will be cheaper.  This should not only slow the decline in home prices but may even help the market recover.

While Fannie Mae and Freddie Mac don’t offer initial mortgages they do hold and guarantee almost half of the total outstanding mortgages in the United States.  They buy mortgages from lenders and either keep them as an investment or resell them to others to hold as investments.  Knowing that Fannie and Freddie are willing and able to assume the mortgages has allowed direct lenders to offer more mortgages at lower interest rates.  With the failing housing market the Fannie and Freddie have had their borrowers fall behind or default altogether on their mortgages.  This caused the companies to lose billions of dollars and made it almost impossible for them to generate revenue to buy additional loans.

There are several provisions included in the rescue plan.  Both companies will slowly increase their mortgage holdings through 2009.  This is a necessary move if the housing market is to stabilize.  After 2009 they will be forced to reduce their mortgage holding to limit their financial risk.  The Treasury Department has agreed to buy $100 billion in stock from each company to allow them to pay off their private debt and they will continue to lend the companies money through 2009.