Government Takes Control of Fannie, Freddie

The way I see it there will now be more money for mortgages and hopefully at cheaper prices. We may see foreclosures slowing down. My biggest question is…will housing price depreciation come to an end?

Read on for more information I gathered from various news sites:

The Government on Sunday seized control of mortgage finance companies Fannie Mae and Freddie Mac, launching what could be its biggest federal bailout ever, in a bid to support the U.S. housing market and ward off more global financial market turbulence.

"Our economy and our markets will not recover until the bulk of this housing correction is behind us," U.S. Treasury Secretary Henry Paulson said at a news conference. "Fannie Mae and Freddie Mac are critical to turning the corner on housing."

Freddie Mac chief executive Richard Syron and Fannie Mae's CEO, Daniel Mudd, were ousted and replaced by David Moffett, a former top official at US Bancorp.

The two companies, publicly traded but also serving a government mission to support housing, were put in a conservatorship that allows their stock to keep trading but puts common shareholders last in any claims.

In addition, the U.S. Treasury will immediately take a $1 billion equity stake in each company in the form of senior preferred stock and if needed could inject up to $100 billion into each firm.

The government's senior preferred stock would rank above both existing preferred and common shares and will carry warrants that could give the government an ownership stake of 79.9 percent.

Treasury also set up a program under which it would buy mortgage-backed securities currently held by Fannie Mae and Freddie Mac to pump fresh funds into the mortgage market.

The Treasury Department said the plan to shore up the finances of the two government-sponsored enterprises, which have $1.6 trillion in debt outstanding, should not cost U.S. taxpayers money in the long run and could even return cash to the government caissons eventually.

The companies have suffered combined losses of nearly $14 billion in the last four quarters and large holders of their debt, including overseas central banks, have begun to show signs of increasing nervousness over their financial health.

Federal Reserve Chairman Ben Bernanke said in a statement that he "strongly" endorsed the action. "These necessary steps will help to strengthen the U.S. housing market and promote stability in our financial markets," he said.

As part of the plan, FHFA will operate the companies until they are stabilized and the Treasury will extend financing to the companies, as well as to the Federal Home Loan Banks, through a new lending facility until Dec. 31, 2009, if needed.

In addition to the senior preferred stake Treasury is taking in the companies, it will immediately receive warrants for the purchase of some common stock.

What is a conservatorship? Basically it means that the government is going to run Fannie and Freddie.