Fannie, Freddie Plan Staves Off Disaster

While the ultimate ramifications for taxpayers remain uncertain, homeowners trying to sell today can thank the government for providing a backstop to Fannie Mae(FNM) and Freddie Mac(FRE).

Fannie and Freddie either own or guarantee about $5 trillion of residential mortgages, roughly half the amount outstanding in the U.S. If either government-sponsored entity were to fail, the ramifications for mortgage lending would be severe and housing prices would plummet further.

On Sunday, the U.S. Treasury temporarily increased the department's lines of credit for the two companies. The plan will also give the Treasury temporary authority to purchase equity in the two companies to increase their capital. Fannie and Freddie also now have access to the Federal Reserve's emergency lending window.

The increased federal role may spell long-term trouble for the U.S. dollar, since taxpayers or increased budget deficits are likely to fund any bailout of the mortgage giants.

Nonetheless, saving the housing market from further short-term pain clearly remains a priority among government officials. Housing prices continue to fall across the country due to meager demand and almost record high inventories.

"The bailout is for the housing market and the broader U.S. economy," says Wachovia economist Mark Vitna. "Fannie Mae and Freddie Mac provide an enormous amount of liquidity to the mortgage market. Without them, mortgage rates would be significantly higher."

Already, mortgage rates jumped sharply last Friday after reports surfaced about liquidity problems at Fannie and Freddie, Vitna says.

Some experts have said the U.S. is currently facing a housing downturn that is the worst since the Great Depression.

After the failure of IndyMac Bancorp (IMB) and the government's pledge to backstop mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE), what will be the next financial company to require federal help?
	Lehman Brothers (LEH) Washington Mutual (WM) National City (NCC) Downey Financial (DSL) Let the market sort all this out.