Page last updated at 14:45 GMT, Monday, 8 September 2008 15:45 UK
US rescues giant mortgage lenders

By Greg Wood
North America business correspondent, BBC News

US home for sale
The move could give a boost to the US housing market

Wall Street has reacted with enthusiasm and no little relief to the US government's takeover of Fannie Mae and Freddie Mac.

The fate of the two US mortgage giants has been weighing heavily on investors' minds.

But, now that they have the explicit backing of the authorities, it should help to bolster the housing market which has been the source of so many of the US's economic problems.

As one leading US economist put it: "The Federal Government has now become the nation's mortgage lender."

The two firms:
Buy mortgages from approved lenders and then sell them on to investors - rather than lending directly to borrowers
Guarantee or own about half of the $12 trillion US mortgage market
Are relied on by almost all US mortgage lenders
Are looked to for funds to meet consumer demand for mortgages
Link mortgage lenders with investors - keeping the supply of money widely available and at a lower cost
Have no direct UK equivalent

There are many investors here who have lent money to Fannie and Freddie. They hold billions of dollars worth of debt in the two companies.

Today the value of that debt has soared and the interest rate that Fannie Mae and Freddie Mac have to pay to investors has fallen.

This is the key mechanism by which the US government hopes to revive the housing market. If the trend continues it means that Fannie and Freddie will be able to issue new debt - borrow money - more cheaply.

Because the two companies provide so much of the funding for new home loans in the US, that should lead - over time - to lower mortgage rates.

It's predicted that 30-year mortgage rates could fall by nearly 1%, providing much needed relief to cash-strapped home owners.

But that's a long way off and there are many aspects of this government takeover which are raising concerns, in particular the estimated $200bn or more of taxpayers' money which will be pumped into Fannie Mae and Freddie Mac.

Turning point?

The US Treasury Secretary Hank Paulson said that many people believed the housing market would turn the corner and that the economy would stabilise, in which case taxpayers could actually make money out of their involuntary investment in Fannie Mae and Freddie Mac.

But the overwhelming judgment among investors and commentators here is that the US government had no choice but to intervene in the way that it did.

Between them, Fannie Mae and Freddie Mac own or guarantee nearly half the outstanding mortgage debt in the US.

Over the last year the two companies have lost nearly $14bn (7.9bn) as growing numbers of homeowners defaulted on their mortgage loans.

Because of those losses, private investors were unwilling to provide Fannie and Freddie with the new capital they needed. So the government had to do it instead.

The hope is that this will mark the turning point of the credit crunch and encourage more lending by banks, not just in the US but around the world.

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