Over the weekend, the government announced that Fannie Mae and Freddie Mac were placed in conservatorship. This means that the two companies will temporarily be run by their regulator, the Federal Housing Finance Agency. The Fannie and Freddie Boards and Executive Officers were replaced, but employees were encouraged to stay. The stated objectives of this action were to stabilize the mortgage market, insure the availability of funding for new mortgage loans, and insure that new mortgages are affordable.

While a conservator will have control over Fannie Mae and Freddie Mac, product availability and day to day operations for the origination of mortgages are expected to continue uninterrupted and essentially unchanged. Fannie and Freddie are expected to increase the number of mortgages they own this year and next year, before reducing their portfolios beginning in 2010. Fannie and Freddie together own or guarantee roughly half of the $12 trillion in outstanding mortgage debt, and they are currently responsible for about 75% of all new mortgage originations, so the viability of the two companies is essential for an efficient mortgage market.

As a result of the takeover, the government now explicitly guarantees the obligations of Fannie and Freddie securities. This has removed uncertainty and increased the demand for mortgage securities. Both domestic and foreign investors had recently reduced their purchases of mortgage securities, and they are now expected to be comfortable stepping up their purchases again. Mortgage rates reacted favorably to the news on Monday.

More notes:

The government will provide up to $200 billion in capital to Fannie and Freddie
The government will own 80% of Fannie and Freddie
The US Treasury will begin purchasing mortgage securities issued by Fannie and Freddie
Foreign investors own more than $5 trillion of Fannie/Freddie debt and mortgage securities

Derrick