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MELISSA BLOCK, host:

From NPR News, this is All Things Considered. I'm Melissa Block.

ROBERT SIEGEL, host:

And I'm Robert Siegel. The federal government's decision to seize control of mortgage giants Fannie Mae and Freddie Mac this weekend has already had at least one positive outcome. Today, mortgage rates plunged. U.S. officials said yesterday that they would place the companies in a kind of conservatorship. They also said the government would invest directly in the companies as a way of keeping them afloat during the current housing downturn. But there are plenty of questions about what will happen once the downturn passes. Here's NPR's Jim Zarroli.

JIM ZARROLI: Fannie Mae and Freddie Mac play a central role in the mortgage market, and federal officials are hoping that the takeover of the companies brings some stability to the battered housing industry. So far they haven't been disappointed. The 30-year fixed mortgage rate fell by half a percentage point. Bill Gross of the bond firm Pimco thinks this could be just what the market needs.

Mr. BILL GROSS (Managing Director, Pimco): This is definitely a positive step on Monday. We'll see what happens going forward. But if the Treasury buys mortgages like they're promising to do, I would think that mortgage rates could come down even lower.

ZARROLI: But the interest rate paid for Treasury bills went up, a sign that investors are nervous about the large debt burden the government is taking on. Throughout the financial markets, there were just as many questions as answers about the future of the two companies. U.S. officials portrayed the takeover as temporary, but they also left no doubt they want a fundamental rethinking of how Fannie and Freddie operate. Among other things, they want to see the companies scale back their huge portfolios of mortgage-backed securities. Christopher Whalen of Institutional Risk Analytics says that by amassing all these securities, the companies have grown richer and more powerful. But he says that Fannie and Freddie typically have to borrow to pay for them.

Mr. CHRISTOPHER WHALEN (Managing Director, Institutional Risk Analytics): So they're not adding anything to the marketplace. They're actually competing with private banks and investors for those dollars that they borrow. There's absolutely no purpose to it. It's simply to generate earnings for the public shareholders.

ZARROLI: Whalen says he'd like to see the companies refocus on their original mission of buying mortgages from lenders in an effort to make the housing market more liquid. But Jonathan Koppell who directs the Millstein Center for Corporate Governance at Yale says any effort to alter the size or mission of the companies is bound to face opposition from Democrats in Washington.

Dr. JONATHAN KOPPELL (Director, Millstein Center for Corporate Governance and Performance, Yale): The congressional committees that oversee Fannie Mae and Freddie Mac have made it clear that they have a strong interest in seeing the companies perform this role of extending credit to as many Americans as possible.

ZARROLI: Already today there were some grumblings from Democratic congressional leaders about parts of the Bush administration plan. Senator Christopher Dodd of Connecticut who chairs the Banking Committee was asked what reducing the companies' portfolios might mean for the housing market.

Senator CHRISTOPHER DODD (Democrat, Connecticut; Chairman of the Senate Banking Committee): That's a great question, and it certainly will be one of the top five or six questions that get asked at our hearing. And I've had others in the private sector raise that question this morning already.

ZARROLI: Dodd said the question for Congress is not how big the companies' portfolios are, but how risky. And he says Fannie and Freddie's investments have traditionally been safe. One thing is certain, deciding the companies' future will be a complicated and time-consuming task. Although, the Bush administration has made its preferences clear. The real fate of Fannie and Freddie will probably be in the hands of the next administration. Jim Zarroli, NPR News.

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