Government takes over two mortgage companies

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By Kathleen Davis

The federal government recently took control of the home loan banks Fannie Mae and Freddie Mac. They were originally created by the government to boost the amount of mortgage loans, but eventually both were privatized. When they were created they were set up as sponsored banks, which meant that there was a clause to allow the government to jump in and take them over again if need be. They have been private corporations until recently.

So what does this mean exactly? It is hard to tell the long-term effects so soon, but there have definitely been a couple of standout short term effects. They are the changes that have been seen in the interest rates and stock markets.

Already the interest rates for mortgages have declined, according to CNNmoney.com. But that doesn’t mean everyone can get these lower rates. The restrictions for getting a loan have changed. A borrower needs a high credit rate and a 20 percent down payment to apply for the lowest interest rate. Earlier this year the companies even increased fees for lower credit scores. So some end up paying less for a mortgage loan, while others have fees piled on.

According to an article in the Los Angeles Times, the economy has already seen positive effects from the takeover. Soon after the government announced it would be taking the companies, the stock market saw a huge improvement. The Dow Jones industrials alone had their seventh-biggest day of the year because of this, according to an article that appeared in the Chicago Tribune. This article also claimed that European and Asian markets experienced prosperous times, also because of the takeover. This may not last for long though. Initial jumps in stocks don’t mean they will stay up.

All in all, it is still pretty hard to tell whether this will be a good move for the economy. There are certainly standout pros and cons right now. There is no guarantee that stocks will stay raised because of the move. There certainly is no way to tell how long interest rates will stay lower. Only time will tell how this move by the government will affect the economy and those of us who are a part of it.

Originally Published: Issue 705 - September 17, 2008

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