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Analysts: US Takeover of Big Mortgage Firms Likely to Boost Depressed Housing Sector

Reaction to Sunday's takeover of the Federal National Mortgage Corporation, or Fannie Mae, and the Federal Home Loan Mortgage Corporation, or Freddie Mac, has been positive with stock markets on Monday closing higher and experts saying mortgage interest rates will likely come down. VOA's Barry Wood takes a closer look at what it means for the U.S. government-sponsored mortgage giants and the economy.

Bert Ely, based in suburban Washington, is an expert on mortgage finance. He says that the government takeover of Fannie Mae and Freddie Mac will be good for some U.S. consumers. "From the standpoint of homeowners and prospective homeowners, the expectation is that this will help to bring down mortgage interest rates," he said.

Ely says that if rates fall below 6.5 percent nationally, that could give a much-needed boost to the depressed real estate market.

Home prices in the United States have fallen about 15 percent during the past year. The mortgage market has not functioned properly this year as financial institutions tightened their lending standards and sought to preserve their capital in the face of the credit squeeze that has escalated since August 2007. Several investment banks have gotten into trouble and the stock prices of financial institutions have plummeted.

Jeffrey Palma, an equity strategist at UBS Securities in New York, says financial markets are applauding the government takeover of the two government-sponsored enterprises, or GSEs -- Fannie Mae and Freddie Mac. "There's no question that the takeover of the GSEs is being regarded very positively. It certainly reduces an uncertainty that was out there. I think it probably does limit the possibility of our having a very deep economic downturn here in the United States," he said.

Both Ely and Palma spoke on Bloomberg Television Monday.

What is not clear is how much taxpayer money will be spent. Under the takeover, the U.S. government will buy preferred stock in Fannie Mae and Freddie Mac. The dividends paid to common stock shareholders are being eliminated as is the current top management. Once the housing market recovers, both institutions will be diminished in size and presumably, several years from now, sold back to private investors. Fannie and Freddie hold mortgage securities valued at several trillion dollars and their own securities are held by major institutional investors worldwide.

Famed investor Warren Buffett, applauds the government takeover of the two mortgage institutions. He says there was no alternative, given their huge participation in the U.S. housing market.

However, some critics say the action represents a massive intrusion by the government into the private sector that is likely to have unanticipated, long-term consequences.

For 40 years, Fannie Mae and Freddie Mac have operated under an implicit government guarantee that is now explicit.