Congratulations America. You just bought half the homes in America.
NEW YORK (CNNMoney.com) — Federal officials on Sunday unveiled an extraordinary takeover of Fannie Mae and Freddie Mac, putting the government in charge of the twin mortgage giants and the $5 trillion in home loans they back.
Under conservatorship, the government would temporarily run Fannie and Freddie until they are on stronger footing.
Which is to say forever?
Time will tell if this move will only serve to lengthen the “house cleaning” that the market would have delivered without the government’s intervention. Institutions of this size represent a pillar in our economy and financial infrastructure, and it’s hard to say whether a free market approach, a government intervention or something in between is indicated.
Treasury secretary Paulson hints that this may not be a permanent takeover.
Government support needs to be either explicit or nonexistent, and structured to resolve the conflict between public and private purposes,” Paulson said. “We will make a grave error if we don’t use this time out to permanently address the structural issues presented by the GSE’s,” he added, a reference to the companies as government-sponsored enterprises.
How much will this cost? No one knows yet. It will have a “B” in front of it.
Paulson said the Treasury Department would provide as much money as needed to keep the companies’ capital reserves from falling below the levels that would trigger rules that automatically put them into receivership.
I guess they were right…
Critics have long argued that Fannie and Freddie were taking advantage of the widespread assumption by investors that the federal government would bail them out if they got into trouble. Administration officials as well as the Federal Reserve have argued that the two companies used those implicit guarantees to borrow money at below-market rates and lend money at above-market returns, and that they had become what amounted to gigantic hedge funds operating with only a tiny sliver of capital to protect them from unexpected surprises.
Is there an upside?
Probably. The stock market should react favorably. Mortgage rates should fall almost immediately.
The future? With a Dem-controlled Congress…guess who’s next: