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Freddie Mac, Fannie Mae Failure Imminent

It’s no longer imminent, Freddie Mac and Fannie Mae have been assumed by the Federal Housing Finance Agency [3].

It seems extremely likely that the government will be taking over Freddie Mac and Fannie Mae.

Experts believe that this weekend, a mere two months after Treasury Secretary Henry Paulson secured permission from Congress, the government will put the two mortgage giants into conservatorship. It’s the same thing that the FDIC does to banks when they fail (another one, Silver State Bank in Nevada [4], went under on Friday, they are now under the management of the Treasury. The FDIC often tries to find a buyer, but in this case that probably won’t happen (Silver State Bank was taken over by Nevada State Bank of Las Vegas and branches are expected to be open on Monday for business).

Why is government rescuing these two companies? It’s because they own a ton of mortgages and need time to weather the storm. By putting the organizations into conservatorship, they prevent the company’s leadership from taking any risky gambles to try to get out of this mess. They also improve both organizations’ ability to borrow money and it calms down the housing market. Much of the liquidity in the housing market comes from the fact that Freddie and Fannie are willing to buy loans from smaller lenders. That’s the reason why jumbo loans often have much higher interest rates, you can’t sell a jumbo loan to Freddie or Fannie (the loan amount is above their limits). If that liquidity goes away, the housing problems we’ve been seeing will get much much worse.

How does this affect you? It probably won’t. Fortune estimates it would cost tens of billions to bail out these two organizations, which isn’t too bad considering they have $5 trillion on their books (and most of those are for loans that won’t default). If you were a common shareholder, your shares are likely worth nothing now. If you had any of their bonds, you’re still perfectly fine.

We live in interesting times!

Paulson readies the ‘bazooka’ [5] [Fortune]
U.S. Rescue Seen at Hand for 2 Mortgage Giants [6] [New York Times]