Experts react to mortgage bailout

September 8, 2008 11:12:43 PM PDT
The biggest buzz in the financial markets is the government's takeover of mortgage giants Fannie Mae and Freddie Mac. Some analysts are calling it "the mother of all bailouts."

The government will now take control of the two giants, replace their CEOs and will infuse some new cash into a struggling economy.

Together Fannie Mae and Freddie Mac hold or guarantee $5 trillion in mortgages -- almost half of the nation's housing debt.

Economist Terry Connelly with Golden Gate University says the government bailout prevented a disaster of epic proportions.

"If these entities had gone down, it would have been like the Titanic going down. I think the Treasury had an early enough S.O.S. here that it had time to intervene," says Connelly.

That intervention takes the form of a government conservatorship. For a limited time, the Treasury will provide as much money as needed to cover losses and continue guaranteeing new mortgages.

There was an immediate applause from overseas investors and Wall Street, which drove stocks up nearly 300 points.

"It helps get this whole mortgage finance pipeline going again because it's been sputtering for about a year," says Alistair Barr with MarketWatch.com.

Even with a record number of foreclosures on the market, credit has been too tight to really jumpstart the housing market. Doug Jones has been in the mortgage business for four decades. He says, generally, he doesn't favor bailouts, but says this could be a pivotal turning point.

"I think this could be a time when we look back and say this was the time it started back up again. I think this is going to open doors to people who want to buy and haven't been able to buy. Why do I say that? Because it's actually going to push interest rates back down," says Jones.

In fact, mortgage rates reacted quickly, falling one half of one percent on Monday.

Still, the government's plan all but wipes out any value stockholders have in Fannie Mae and Freddie Mac. The move could cost taxpayers anywhere from $25 billion to as much as $200 billion.

Terry Connelly believes the alternative could have been a financial depression.

"Whether it's a winner or loser, doesn't matter as much as it absolutely had to happen."

Taxpayers bear the brunt of any losses because the money just adds to our national debt. It will be up to the new administration to determine what shape and future the two companies will have.


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