Market Rallies on Mae & Mac News

September 8, 2008 12:00:00 AM PDT
The government's plan to take over mortgage companies Fannie Mae and Freddie Mac has spurred a rally in the stock markets. The Dow jumped 300 points in the first few minutes of trading.It's the largest financial rescue in history, and it touches the lives of millions of Americans.

Both lenders are responsible for $5-trillion dollars in home loans which accounts for about half the nation's total.

Washington's takeover of Fannie Mae and Freddie Mac is already having a ripple effect around the globe. Asian stock markets soared Monday, though one analyst warns it will take more than the bail-out of the two mortgage giants to restore investor confidence.

"I don't think this is the only one source of the global recession, I mean the risk for the global recession is not only the financial market turmoil but also the current momentum of the economy all over the world," said Masamichi Adachi with JP Morgan Securities.

Fannie Mae and Freddie Mac, which own or guarantee about half the nation's mortgages, have been crippled as home values fall and foreclosures have risen to record levels. "Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil here at home and around the globe," said U.S. Treasury Secretary Henry Paulson.

Starting Monday, the companies will be placed in a government "conservatorship." It means, for a limited time, the Treasury Department will provide as much money as is needed to cover any losses and continue guaranteeing new mortgages.

Still, the government's plan will all but wipe out any value that stockholders have in Fannie and Freddie. "You'd have to look back to the days of the great depression to see such a huge government intervention with such major implications," said Pete Seep with the National Taxpayers Union.

The takeover is expected to cost taxpayers between $25 and $50 billion dollars though it could potentially cost $200-billion. Analysts said that's nothing compared to the cost to the economy had Fannie and Freddie been allowed to fail. "You need someone like Uncle Sam who nobody will question the ability to survive stepping in actually acting as a backstop," said Guy Secala with Inside Mortgage Finance.

The good news is for those looking to get a mortgage or refinance a mortgage: the take-over could mean a lower interest rate.


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