08 September 2008 18:52 [Source: ICIS news]
The Treasury Department announced on Sunday that it was putting the giant mortgage loan institutions - known as Freddie Mac and Fannie Mae - under federal conservatorship, pledging billions of dollars to cover bad debt that may have been incurred by the two institutions during the home market crisis.
Freddie Mac - the commonly used name for the Federal Home Loan Mortgage Corporation - and Fannie Mae, the Federal National Mortgage Association, are both privately owned and run government-sponsored lending institutions.
Both institutions buy home mortgages and repackage those bank loans for resale as mortgage-backed securities to private investors in what is known as the secondary mortgage market. Between them, the two financial giants own or guarantee about half of the
The Treasury Department’s action was seen as necessary in order to keep both institutions solvent and to ensure their ability to continue to provide liquidity to the home mortgage market.
“We are hopeful that the government’s action on Fannie Mae and Freddie Mac will help to increase liquidity in the nation’s mortgage markets and restore confidence,” said Jerry Howard, chief executive of the National Association of Home Builders (NAHB).
Howard said the federal take-over of the two privately held financial juggernauts was “absolutely vital to rebuild the nation’s secondary mortgage market and provide affordable mortgages for
Richard Gaylord, president of the National Association of Realtors (NAR) said the federal bailout of the two mortgage institutions is a “bold action to bring stability and continued liquidity to the nation’s mortgage market”.
“NAR believes that the plan will help restore confidence in the secondary mortgage market,” Gaylord said, adding: “This demonstrates that the government is clearly committed to keeping the flow of capital uninterrupted, which is crucial to the housing sector and the economy.”
Kevin Swift, chief economist at the American Chemistry Council (ACC), said that while he had not yet seen full details of the federal take-over, “the reaction of the financial markets has been favourable, suggesting it will help stabilise the market”.
In the wake of Treasury’s announcement on Sunday, Asian markets responded with upturns and US stock exchanges saw sharp gains at first opening on Monday morning.
However, Swift cautioned that while Treasury’s intervention is seen as favourable, the housing sector remains pressed.
“We still have too many homes for sale relative to the number of buyers, and it will take some time to work down the excess inventory,” Swift said.
($1 = €0.70)
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