Government Proposes Measures to Help Fannie Mae and Freddie Mac

One of the biggest worries right now, especially on the heels of failed mortgage lender IndyMac, is that Fannie Mae and Freddie Mac will also fold, cracking under the strain of losses due to subprime loans. This is a big deal, since Fannie Mae and Freddie Mac are the two largest buyers of mortgage loans in the country. They are government chartered banks, and as such have preferred status when it comes to certain perks, and on mortgage rates. But, the US government warns, if Fannie Mae and Freddie Mac become insolvent, that could really bring down the entire mortgage industry -- and maybe cripple the financial system. And no one wants that.

Government authorizes new measures to save Fannie Mae and Freddie Mac

In an effort to avoid failures by Fannie Mae and Freddie Mac, the Bush Administration has suggested the following moves:

*Allow the government to buy stock in Fannie Mae and Freddie Mac if additional capital is needed to keep the companies afloat.
*Increase the lines of credit that Fannie Mae and Freddie Mac can already tap into in order to increase their liquidity.
*Authorize the Federal Reserve to make emergency loans to Fannie Mae and Freddie Mac.

These moves, however, would only be used with the government chartered mortgage lenders. Other, more private, lenders would not have the same access to the government's (read taxpayer funded) largess.

And, honestly, the moves would probably be able to save Fannie Mae and Freddie Mac should circumstances become dire. (Right now, though, the lenders insist that they don't need the help yet.) But the government has other motivation as well. It wants to send a clear message that it will not leave the economy to flounder and the mortgage industry to fail. The government is interested in instilling confidence into our financial system, and this move is one way it can do so.

Congress needs to approve the move, and tagged the measures into an amendment to the housing relief bill. This means that, since the Fannie Mae and Freddie Mac measures have been labeled urgent, legislators are hurriedly casting aside differences on the housing relief bill. In fact, the addition of the provisions affecting the two mortgage lenders will probably have the effect of getting the housing relief bill passed through weeks earlier than possible otherwise.

But we'll have to wait and see how the housing relief bill -- along with its updated treatment of Fannie Mae and Freddie Mac -- really does affect the economy.