The federal bailout of Fannie Mae and Freddie Mac involves putting the companies under conservatorship and placing the Federal Housing Finance Agency in charge of their operations and appointment of senior managers. The government has dismissed Fannie Mae and Freddie Mac’s CEOs – who will, however, assist in the transition – and will provide capital, if necessary.
The plan also calls for a cut in the stake of current shareholders to 20% from 100%. It additionally will require an increase in mortgage funding by Fannie Mae and Freddie Mac through the end of next year to stabilize the housing market; however, mortgage volume will be reduced 10% annually for a decade beginning in 2010 to reduce risks to the overall financial system. The companies – which will no longer be allowed to lobby or engage in other political activities – will be restructured by Congress before 2010.
For the short term, this move will hopefully bring some stability to the housing outlook. Long-term implications of this move and the ultimate impact on the market will not, however, be fully known for some time. This could certainly be a good short term solution, but at the same time, a horrible long term solution for the market.
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