U.S. Government to take over Fannie Mae and Freddie Mac

Uncle Sam together with Freddie and Fannie

This past Sunday, the U.S. government officially took over the gigantic mortgage companies Fannie Mae and Freddie Mac, in what will most likely prove to be the largest federal bailout our government has ever participated in. Bigger then the Savings and Loan crisis. Concerned over huge losses from the two companies, the government has stepped in to help reverse the prolonged housing and credit crisis, and is now responsible for roughly $6 trillion in outstanding mortgage debt.

One of the first items on the government’s ajenda, was to replace the existing management. Freddie Mac’s chief executive Richard Syron and Fannie Mae’s CEO, Daniel Muddy, were replaced by David Moffett, and Herb Allison, respectively. Second, with a pledge to shore up the finances of America’s largest lenders, the government committed up to $100 billion in support for each of the two behemoths. Additionally, the U.S. Treasury will take about a $1 billion equity stake in each institution, in the form of senior preferred stock with a guaranteed 10% rate of return. This stock will rank above both existing preferred and common shares and could give the government an ownership stake of up to 79.9 percent.

The treasury is to begin buying mortgage-backed securities issued by the two companies this month. And there will be a 15-month deadline for the move to make its impact before the mortgage agencies are reduced in size and their future decided in 2010. The clock is ticking.

In a very positive response, stocks sored as the Dow Jones climbed nearly 300 points on Monday, while the interest rate dropped from around 6.5 % on Friday, to 6% on Monday. Analysts believe it will eventually settle in at around 5.5%. This is good news.

At a time when it seemed interests rates had nowhere to go but up, thousands of potential home buyers just got some very good news. And with the price of oil dropping at the moment, could this be the turnaround we all have been hoping for? It certainly seems that way to me. 

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