Fannie Mae and Freddie Mac: Mortgage Bailout Will Be Expensive

Sept. 8, 2008— -- The federal takeover of mortgage giants Fannie Mae and Freddie Mac will likely lower the cost of a mortgage for buyers with good credit, but it will also likely stick U.S. taxpayers with a bill in the tens of billions of dollars, analysts have concluded.

The mountain of losses by the two huge quasi-governmental agencies threatened the entire mortgage and credit industry since Fannie and Freddie, as they are popularly known on Wall Street, back up nearly half of the country's mortgages.

Both companies were placed on Sunday into a government conservatorship that will be run by the Federal Housing Finance Agency, the new agency created by Congress this summer to regulate Fannie and Freddie.

Their top executives were fired and replaced by Wall Street veterans. Herb Allison, 65, a former president of Merrill Lynch who most recently led the TIAA-CREF pension fund, will take the corner office at Fannie Mae. David Moffett, 56, a former U.S. Bancorp executive who last year joined the politically powerful Carlyle Group private equity firm, will become CEO of Freddie.

The twin takeover, the largest government rescue mission in U.S. history, is packed with global economic repercussions.

But for homeowners with a fixed rate mortgage that is being paid for, nothing changes.

For those looking for a mortgage or looking to refinance, mortgage rates may actually go down if the takeover succeeds in stabilizing the market and restoring investor confidence in the market.

Mark Zandi, chief economist at Moody's Economy.com, predicted that 30-year mortgage rates, currently averaging 6.35 percent nationwide, could dip to close to 5.5 percent.

That's because investors will be more willing to buy the debt issued by Fannie and Freddie -- and at lower rates -- since the federal government is now explicitly standing behind that debt.

"Effectively, the federal government has now become the nation's mortgage lender," Zandi said. "This takes a major financial threat off the table."

There are initial signs that the government's actions are having the hoped-for effect. U.S. stock futures jumped more than 1 percent and pointed to a huge rally today. World markets also soared on the news of the takeover.