Government is now ‘nation’s mortgage lender’

updated 10:50 a.m. ET Sept. 8, 2008

WASHINGTON - Uncle Sam has just become the 800-pound gorilla in the U.S. mortgage market.

The Bush administration announced Sunday it was seizing troubled mortgage giants Fannie Mae and Freddie Mac in a bid to help reverse a prolonged housing and credit crisis.

But private analysts worried that it may not be enough to stabilize the slumping housing market given the glut of vacant homes for sale, rising foreclosures, rising unemployment and weak consumer confidence.

Mark Zandi, chief economist at Moody's Economy.com, predicted that 30-year mortgage rates, currently averaging 6.35 percent nationwide, could dip to close to 5.5 percent. That's because investors will be more willing to buy the debt issued by Fannie and Freddie — and at lower rates — since the federal government is now explicitly standing behind that debt.

"Effectively, the federal government has now become the nation's mortgage lender," he said. "This takes a major financial threat off the table."

Officials announced that both Fannie Mae and Freddie Mac were being placed in a government conservatorship, a move that could end up costing taxpayers billions of dollars.

Treasury Secretary Henry Paulson refused to estimate how much the takeover of the two companies will cost the government, but he insisted that taxpayers will get paid back first.

"We structured this facility to protect the taxpayer," Paulson said Monday in an interview on the CBS Early Show. "The government will be repaid ... before the shareholders of these companies get a penny."

In a separate appearance on CNBC, Paulson said "we obviously don't know" when asked how much the takeover could end up costing taxpayers. He said that will depend on how quickly the housing market turns around.

The plan touched off a global stock rally Monday. Japan's Nikkei stock average jumped 3.4 percent and Hong Kong's Hang Seng index surged 4.3 percent. In morning trading, Britain's FTSE 100 jumped 3.81 percent, Germany's DAX index rose 3.21 percent, and France's CAC-40 surged 4.44 percent.

Wall Street rallied, as the Dow jumped more than 2 percent in the first hour of trading.

The companies, which together own or guarantee about $5 trillion in home loans, about half the nation's total, have lost $14 billion in the last year and are likely to pile up billions more in losses until the housing market begins to recover.

The Treasury Department said it was prepared to put up as much as $100 billion over time in each of the companies if needed to keep them from going broke, in exchange for senior preferred stock. Treasury will immediately be issued $1 billion of such stock from each company, which will pay 10 percent interest. Further purchases of preferred stock will be triggered if quarterly audits find that the companies' capital cushion is below prudent standards.

The government, which will receive warrants representing ownership stakes of 79.9 percent in each company, is hoping that its moves will reassure nervous investors that they can continue to buy the debt of the two companies.

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