Fannie Mae/Freddie Mac Under Government Control

On September 7th, 2008 Treasury Secretary Henry Paulson and Federal Housing Finance Agency (FHFA) Director James Lockhart announced that the U.S. Treasury would take control of battered mortgage kingpins Fannie Mae (FNMA) and Freddie Mac (FHLMC). It is estimated that Fannie and Freddie back over $5 trillion in home mortgage loans which account for about half of the nation's outstanding mortgage debt. With the loss of a number of mortgage companies over the last few years, Fannie and Freddie have come to be relied upon as nearly the only source of funding for consumers wishing to purchase homes. Combined, the two have lost over $12 billion in the last year due to mortgage defaults. Prior to the announcement, stock prices of the two had fallen over 80% on the year.
Under the new plan, Fannie and Freddie will be supervised by FHFA. Treasury will offer support by purchasing mortgage backed securities from and lending money for additional home loans to the mortgage giants. In hopes of stabilizing them, Treasury and FHFA will assume some ownership of Fannie and Freddie by purchasing stock in them.
Many experts believe this will be a band-aid fix to get the companies through the rest of 2008 and into 2009. Thereafter, the fate of Fannie and Freddie will be in the hands of the new administration.
UPDATE: So far, this move has not reduced the cost of borrowing for consumers. Interest rates have actually inched up slightly since the announcement. Of course, there are many other factors in play so this program can't necessarily be at fault for the rise in interest rates. Hopefully the markets will begin to steady as we enter 2009.