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FANNIE MAE, FREDDIE MAC TAKEOVER BY U.S. - How Will It Help Housing Market, and Home Owners?

U.S. STOCKS, DOLLAR UP ON TREASURY DEPARTMENT ACTION, MORTGAGE INTEREST RATES PREDICTED TO DROP!

In a move widely applauded by the President Bush and both major U.S. Presidential Candidates, as well as investors around the world, the U.S. Treasury Department took control of Mortgage Giants Fannie Mae and Freddie Mac on Sunday.  Treasury will put up up to $100 Billion to shore up each company, including $1 Billion of stock immediately, on which the government will pay 10% interest.

In response to the news, the Dow Jones Industrial Average jumped 289.78 points, or 2.58% today, after being up nearly 350 points in earlier trading.  Bond prices pulled back.  Mortgage fund investors across the globe felt encouraged.  All the while, however, common shares of Fannie Mae and Freddie Mac each dropped to below $1.00 as the value of existing shares were diluted by the action.

Although those in the know were initially wary of Treasury intervention, all agree that shoring up and backing the mortgage giants was a far better option than letting them fail.

Both firms will be placed in a U.S. Government Conservatorship, as the CEO's of each quasi-public institution were immediately ousted - albeit with high severance packages.  The Federal Government will receive an immediate 79.9% ownership stake in each company.  It is hoped this action will restore confidence in financial markets here, and encourage investment in mortgage-backed securities. 

Together, Fannie and Freddie own or back roughly $5 Trillion in home mortgage loans - about half of the total mortgage volume across the U.S.  Both companies buy mortgage loans issued by banks, and package these loans into bundles of mortgage-backed securities they either hold, or sell to investors, domestically or abroad.  This frees money for lenders to make more mortgage loans.  In aggregate, the companies have lost $14 Billion within the past year, and billions more in losses were likely until the housing market sees recovery.

The actions taken by the U.S. Government assures investors their money is backed with the full faith and strength of the Treasury Department.

Skittishness about the safety of funds backed by a troubled Fannie Mae and Freddie Mac might have kept interest rates at recent high levels - as high as 6.50% for a thirty-year fixed-rate loan, in some cases.  Mark Zandi, Chief Economist at MoodysEconomy.com, predicts the same rates could fall to near 5.50%, as investors might now be more willing to buy Fannie and Freddie mortgage-backed securities, at lower interest rates, because the Treasury is standing behind the debt.

Indeed, earlier today, the Average 30-Year Fixed Rate dropped to 6.04%, from 6.34% at the start of the day, according to HSH Associates.

The downsides?  Two big ones!

First, the takeover offers no additional help to homeowners already behind on their mortgage payments, or who owe more on their homes than they are worth in today's real estate market.  According to Rich Cosner, President of Prudential California Realty, "The bailout will give the mortgage industry a stability that we haven't seen in a couple of years.  But, frankly, no, it won't help (struggling borrowers) to refinance" their existing mortgages.

Second, the massive bailout leaves U.S. Taxpayers directly exposed to Fannie Mae and Freddie Mac losses down the road.   The U.S. Deficit can increase, as can inflation, at the expense of the U.S. Dollar against world currencies.

As we all know, however, the tactics of the buyout can be changed by the new U.S. Administration next year.  And homeowners, prospective homeowners, and investors will monitor developments closely over the coming months.

Coverage on this story today was very extensive, and articles abound on the takeover and its likely effects.  Today's lead story in the Wall Street Journal offers further details, and links to other opinions on the Treasury Department move.  Chicago Tribune coverage is equally detailed.

DEAN MOSS & DEAN'S TEAM CHICAGO

Posted: Monday, September 08, 2008 6:14 PM by Dean's Team

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