The federal government took control of Fannie Mae and Freddie Mac on Sunday 9/7/2008 in a bid to keep the two mortgage giants from filing bankruptcy. Together, Fannie Mae and Freddie Mac own or guarantee more than $5 trillion in mortgages, almost half the total outstanding mortgage debt in the United States.

Who are Fannie Mae & Freddie Mac? They buy mortgages from banks and other lenders that make the loans, either keeping them as investments or packaging them for resale to investors. This increases the capacity for lenders such as Wells Fargo and US Bank to make loans and allows them to offer lower interest rates.

How did this takeover affect interest rates? Interest rates fell on average of 1/2 of one percent over the weekend once this takeover was announced and continued to drop through Tuesday.

Why did mortgage rates drop? Mortgage rates fell because investors went on a buying spree Monday for mortgage-backed securities (MBSs). That caused the prices for these bond-like financial instruments to rise and when bond prices rise, yields fall. Mortgage rates followed yields downward.

The government agreed to pump billions of dollars into Fannie Mae and Freddie Mac and assume responsibility for trillions of dollars of their debt, while handing control of the companies to federal regulators. The takeovers could ultimately cost taxpayers tens of billions of dollars, experts estimate, widening the federal deficit.

Why did the federal government intervene? Officials said they moved because the potential failure of the companies threatened to harm our countries financial system and to keep the housing crisis from worsening. Outside experts said the takeovers could stabilize the home loan market, making mortgages cheaper and easier to get. That, in turn, could act to limit any further downward spiral in home prices.

The government's financial rescue of mortgage companies Fannie Mae and Freddie Mac includes the following provisions:

• The two companies will modestly increase their holdings of mortgage securities through 2009, growth that is needed to stabilize the mortgage market. After that, they will be required to cut back their direct mortgage holdings to reduce risk.
• The Treasury Department will buy up to $100 billion in preferred stock from each of the companies to ensure they have capital and are able to pay off their private debt.
• The Treasury Department will also lend directly to Fannie Mae and Freddie Mac as needed through 2009.
• The Treasury Department will buy mortgage securities from brokers to help keep the market healthy.

Source: U.S. Treasury Department

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