US takes over mortgage giants
(9 September 2008 – USA) The US Federal Government has seized control of the nation’s two largest mortgage finance companies, Fannie Mae and Freddie Mac.
The rescue of the two mortgage lenders has added about US$5.4 trillion to potential Treasury liabilities. The amount is the equivalent to the entire federal debt.
The US Treasury secretary, Henry M. Paulson Jr said that it was important to rescue the mortgage giants because a failure of either company would cause turmoil in financial markets in the United States and around the world.
The plan also commits the government to provide as much as US$100 billion to each company to backup any shortfalls in capital. It enables the Treasury to ultimately buy the companies outright at little cost.
The US Treasury will force both companies to shrink their portfolios over the long term. In total, the two now hold or guarantee about half of all mortgages in the United States.
The government also has planned to buy significant amounts of their mortgage-backed securities on the open market, beginning with the purchase of US$5 billion worth.
This step, never before undertaken by the government, could begin to restore some confidence in the credit markets and lead to lower interest rates for home mortgages.
Fannie Mae and Freddie Mac buy mortgages from lending institutions and then either hold them in investment portfolios or resell them as mortgage-backed securities to investors. The two companies play a vital role in providing financing for the housing markets.
The US Treasury secretary, Henry M. Paulson Jr said that it was important to rescue the mortgage giants because a failure of either company would cause turmoil in financial markets in the United States and around the world.
The plan also commits the government to provide as much as US$100 billion to each company to backup any shortfalls in capital. It enables the Treasury to ultimately buy the companies outright at little cost.
The US Treasury will force both companies to shrink their portfolios over the long term. In total, the two now hold or guarantee about half of all mortgages in the United States.
The government also has planned to buy significant amounts of their mortgage-backed securities on the open market, beginning with the purchase of US$5 billion worth.
This step, never before undertaken by the government, could begin to restore some confidence in the credit markets and lead to lower interest rates for home mortgages.
Fannie Mae and Freddie Mac buy mortgages from lending institutions and then either hold them in investment portfolios or resell them as mortgage-backed securities to investors. The two companies play a vital role in providing financing for the housing markets.
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