Takeover at Fannie/Freddie by the Feds

With the government takeover of mortgage agencies Fannie Mae and Freddie Mac, the mortgage market got a needed boost. In the wake of the news, loans from the FHA and other lenders became much less expensive, and that could potentially save the ailing real estate market.

Mortgage giants Fannie Mae and Freddie Mac, like the FHA and similar government-sanctioned housing and mortgage related organizations, came into existence by order of Congress in order to help Americans participate in the dream of affordable home ownership. But over the past several years, Fannie and Freddie were plagued by loose lending, sketchy accounting practices, an unprecedented housing crisis, and a loss of investor confidence in the mortgage markets.

Government at the helm

Now, the twin agencies, which were created to help consumers in the wake of the Great Depression and World War II, are in so much trouble that they're the ones needing financial help. This month, they were taken over by the Treasury Department in order to save them from outright bankruptcy. The takeover, announced by Treasury Secretary Henry Paulson and James Lockhart, Director of the Office of Federal Housing Enterprise, puts both Fannie and Freddie into a conservatorship overseen by the Federal Housing Finance Agency. That means that, at least for now, the government runs Fannie and Freddie.

As Paulson explained, "We examined all options available, and determined that this comprehensive and complementary set of actions best meets our three objectives of market stability, mortgage availability, and taxpayer protection."

On the verge of collapse

While the stock of Fannie last year traded in the high $70s, it can now be bought for close to $.60 cents a share. Much of the trouble at Fannie and Freddie can be attributed to global financial problems and a domestic housing market collapse that nobody foresaw. But the agencies have also been faulted for loose lending and investment practices. Because the companies could ultimately fall back on the American taxpayer to bail them out if they made mistakes, it seems that the management at Fannie and Freddie took unnecessary risks with mortgage security investments. Top executives lost their jobs as a result of the takeover, but they also walked away with "golden parachutes" worth tens of millions of dollars, adding fuel to the fiery argument that Fannie and Freddie were poorly and recklessly managed.

Taxpayers may have to shoulder much of the debt racked up by Fannie and Freddie, and government regulators reported that it might cost $25 billion to rescue the agencies. But when Morgan Stanley was enlisted as a more objective third party to conduct its own assessment, the investment bank concluded that the cost could run as high as $50 billion.

That leads many experts to believe that having quasi-government agencies like Fannie and Freddie is a bad idea. They say it's better to depend upon private businesses-or completely government-controlled entities like HUD and the FHA-to ensure stability in our housing markets.