By now, pretty much everyone has heard about the Fannie Mae and Freddie Mac bailout. However, not everyone knows exactly what this means. Well, it means that both companies (who back more then half the nation’s mortgages) were placed into a government conservatorship which will be run by the Federal Housing Finance Agency – the new government agency created this summer to regulate Fannie Mae and Freddie Mac. The top executives of the companies were replaced by Wall Street veterans. Herb Allison, a former president of Merrill Lynch who most recently led the TIAA-CREF pension fund will become the CEO of Fannie Mae, while David Moffett, who is a former U.S. Bancorp executive and most recently joined the Carlyle Group private equity firm, will become the CEO of Freddie Mac.
The idea behind the bailout is that backing these companies will restore investor confidence in the market, and that these investors will be more willing to buy the debt issued by the two companies since the federal government is now explicitly standing behind that debt. This takeover is the largest government rescue in U.S. history. Of course, something this big will not be without some economic repercussions, both good and bad. The initial signs are that the bailout is having the hoped-for effect. U.S. stock futures have jumped more than 1 percent. Also, world markets have soared after hearing the news of the takeover. However, U.S. bond futures tumbled because of raised concerns about the government taking on additional debt. Analysts are currently trying to figure out how big the taxpayers’ bill is going to be. Most estimates have been that this takeover will end up costing taxpayers’ tens of billions of dollars. Obviously, this is probably the worst consequence.
So what does all this mean for U.S. home owners and home buyers? First of all, for homeowners with a fixed rate mortgage who are making payments, essentially nothing changes. Additionally, homeowners looking to refinance may see that mortgage rates may actually go down – so long as the takeover succeeds in stabilizing the market. For home buyers who have good credit, it will likely lower the cost of a mortgage as well. Only time will tell whether the takeover is truly successful or not, but since the two companies have had combined losses of nearly $14 billion in the last year, it appears this was the last resort option.
Written by Renee Fouquet
