WASHINGTON — Uncle Sam has just become the 800-pound gorilla in the U.S. mortgage market, and the initial reaction on Wall Street was that the gorilla is good.
The Bush administration is seizing troubled mortgage giants Fannie Mae and Freddie Mac to help reverse a prolonged housing and credit crisis.
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"Effectively, the federal government has now become the nation's mortgage lender," Mark Zandi, chief economist at Moody's Economy.com said. "This takes a major financial threat off the table."
Wall Street posted a huge rally Monday as investors reacted with enthusiasm to the government's actions. At the close, the Dow Jones industrial average rose 289.53, or 2.58 percent, to 11,510.49 after being up nearly 350 points in the early going.
The plan also touched off a global stock rally from Japan to Britain as it reassured foreign investors in U.S. mortgage debt.
Treasury Secretary Henry Paulson declined to estimate how much the takeover of the two companies will cost the government, but he insisted that taxpayers will get paid back first.
"We structured this facility to protect the taxpayer," Paulson said Monday in an interview on the CBS Early Show. "The government will be repaid ... before the shareholders of these companies get a penny."
Fannie Mae and Freddie Mac play a critical and increasingly dominant role in the mortgage market. The companies buy mortgage loans from banks and package those loans into securities that they either hold or sell to U.S. and foreign investors. That allows traditional lenders such as Bank of America, Wells Fargo and Washington Mutual to make more loans.
Together, Fannie and Freddie own or guarantee about $5 trillion in home loans, about half the nation's total. But an alarming number of those loans started going into default, draining the companies' financial reserves and sending a chill through credit markets worldwide.
The Treasury Department said it was prepared to put up as much as $100 billion over time in each of the companies if needed to keep them from going broke, in exchange for senior preferred stock. Treasury will immediately be issued $1 billion of such stock from each company, which will pay 10 percent interest. Further purchases of preferred stock are possible.
The government, which will own 79.9 percent of each company, is hoping that its moves will reassure nervous investors that they can continue to buy the debt of the two companies.
In a statement, President Bush said, "Americans should be confident that the actions taken today will strengthen our ability to weather the housing correction and are critical to returning the economy to stronger sustained growth."
The conservatorship will be run by the Federal Housing Finance Agency, the agency created by Congress this summer to regulate Fannie and Freddie.