Mortgage giants Fannie Mae and Freddie Mac are presently undergoing a tough time. With confidence level and shares going down significantly for the past week, some people think that a government bailout is about to happen.
Fannie had a 28 percent drop in shares, while Freddie slid 26 percent. The loss in value now totals to 80 percent since the start of the year.
It's alarming how two financial institutions holding half of the country's mortgages are starting to crumble in the midst of the housing crisis. Failure in both government-sponsored enterprises (GSEs) could have a devastating effect not only here in the United Stated but in other countries as well.
Foreign governments own money used in both companies’ operations. Investors, companies, mutual and pension funds abroad also have money utilized by Fannie and Freddie.
To prevent further damage, the government came up with measures to help Fannie and Freddie get billions of dollars in the form of a “rescue package". The rescue package aims to buy the company stocks using public money. Aside from that, the Federal Reserve will allow both companies to borrow money at a special rate, and would make one of its short-term lending programs available. Aside from that, the administration is seeking the Federal Reserve's permission to let Fannie and Freddie secure liquidity.
The Federal Reserve is closely working with the Congress and Treasury to try and put these rescue measures into effect. The Treasury is also seeking to stretch the credit line for both institutions to $300 billion, and buy equity directly from both GSEs to prevent liquidity problems in the future.
The rescue plan was put into effect after close monitoring of both Fannie and Freddie. The government immediately sought precautionary steps to ensure that both mortgage giants have enough money to stay afloat.
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