Government Plans To Rescue Fannie, Freddie

The government is preparing to takeover mortgage giants Fannie Mae and Freddie Mac, according to reports in The Wall Street Journal and The New York Times on Saturday. An announcement could come as early as this weekend.

According to sources quoted in the reports, the government is going to put the two companies in conservatorship under the control of the Federal Housing Finance Agency. Shareholders in the companies are likely to be wiped out, according to the newspapers, and the top management of the companies will ultimately be removed.

But the companies would continue to do business much has they have before, buying mortgages, packaging them into securities and selling them to investors.

Freddie and Fannie guarantee $5 trillion worth of mortgages, most of them prime. Housing market experts consider it an ominous sign to see those safer loans going bad.

The two companies have already reported billions of dollars in losses, and they're having trouble raising capital to cover future losses. Housing market watchers say that the economy just can't afford to have these companies fail; they are responsible for 70 percent of the mortgages. Doing so would essentially seize up the mortgage market.

What's in store for Fannie Mae and Freddie Mac? Both presidential candidates have expressed dissatisfaction with the companies in their current form. A common view is that the companies should be taken over by the government — as appears to be happening right now — and that over time the should be shrunk or broken up into small pieces and re-privatized as smaller companies.

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