WASHINGTON - The Bush administration's seizure of troubled mortgage giants Fannie Mae and Freddie Mac is potentially a $200 billion bet that it will help reverse a prolonged housing and credit crisis.
The historic move announced Sunday won support from both presidential campaigns, 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.
Officials announced that both giant institutions were being placed in a government conservatorship, a move that could end up costing taxpayers billions of dollars. Treasury Secretary Henry Paulson said allowing the companies to fail would have extracted a far higher price on consumers by driving up the cost of home loans and all other types of borrowing because the failures would "create great turmoil in our financial markets here at home and around the globe."
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.
From CNN: U.S. seizes Fannie and Freddie:
The sweeping plan, announced by Treasury Secretary Henry Paulson and James Lockhart, director of the Federal Housing Finance Agency, places the two companies into a "conservatorship" to be overseen by the Federal Housing Finance Agency. Under conservatorship, the government would temporarily run Fannie and Freddie until they are on stronger footing.
From Bloomberg: Paulson Engineers U.S. Takeover of Fannie, Freddie
``Our economy and our markets will not recover until the bulk of this housing correction is behind us,'' Treasury Secretary Henry Paulson, who engineered the takeover along with Federal Housing Finance Agency Director James Lockhart, said in Washington today. ``Fannie Mae and Freddie Mac are critical to turning the corner.''
Video CNBC.com: Fannie, Freddie: What Steps Next?
In the short term, the Federal bailout of Fannie Mae and Freddie Mac removes the uncertainty from markets. Steve Forbes, Chairman & CEO Forbes Inc, thinks the next step forward should be to split the companies up into pieces, recapitalize them and ship them out into the private markets. Bill Smith, President and Senior Portfolio Manager at SAM ADVISORS and CNBC's Martin Soong, Maura Forgarty, Steve Liesman join in the discussion.