The Federal Reserve and the Treasury announced steps Sunday to shore up mortgage giants Fannie Mae and Freddie Mac, whose shares have plunged as losses from their mortgage holdings threatened their financial survival.
The steps are also intended to send a signal to nervous investors worldwide that the government is prepared to take all necessary steps to prevent the credit market troubles that started last year from engulfing financial markets and further weakening the economy and housing markets.
The Fed said this should help the companies' ability to "promote the availability of home mortgage credit during a period of stress in financial markets."
Secretary Henry Paulson said the Treasury is seeking expedited authority from Congress to expand its current $2.25 billion line of credit to each company should they need to tap it and to make an equity investment in the companies -- if needed.
Sounds more like a loan then a bailout, so why is everyone's panties in a bunch?
While the Bush administration was urging Wall Street to use market discipline to curb lax lending in the worst U.S. housing downturn in decades, its regulators were loosening the reins on Fannie Mae and Freddie Mac.
Taxpayers will now foot the bill.
Amid fears of one of the biggest financial debacles in history, U.S. regulators and politicians are doing whatever it takes to shore up Fannie Mae and Freddie Mac, the twin pillars of the U.S. mortgage market, to reassure financial markets around the world.
With the loan at 2.25%, I fail to see how taxpayers will be on the hook for anything?!?! Am I missing something here? If anything, we'll be MAKING money right? Especially since the government will be buying a piece of each company.
But, just to appease some out there, let's take a look at what would happen if we did nothing:
The damage to the U.S. economy if government-sponsored mortgage companies Fannie Mae and Freddie Mac collapsed would be devastating, Wall Street economists and financial analysts said Friday.
In a worst case scenario, it would severely hamper the U.S. government’s ability to do business, and have far wider ramifications than if the government had allowed damaged investment bank Bear Stearns to implode -- not to mention making the costs for people to buy homes go through the roof.
A government takeover of the entities, whose stocks have lost 75% of their value this week alone, is also viewed as a poor option.
Fannie Mae’s or Freddie Mac’s “insolvency or a nationalization would, in our opinion, destroy investor confidence in the U.S. economy, cause a run on the dollar and force the Fed to raise rates significantly,” said Howard Shapiro, an analyst with Fox-Pitt Kelton in Chicago, in a note.
“Without them, the cost of mortgages would skyrocket,” Laurenti said. “Fannie and Freddie have created a standardized product that’s easy to price. It’s allowed the mortgage market to expand over the years.”
Added Merk, “We need Fannie and Freddie to operate, otherwise people can’t buy homes."
In other words, people would have to go to other areas to borrow money for mortgages. These places would likely charge more interest, and they certainly wouldn't allow sub prime borrowers to get mortgages....which might be a good thing.
Travis
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