Ripples across the pond
Some good news, possibly. British homeowners have reason to welcome the historic
US government takeover of mortgage giants Fannie Mae and Freddie Mac according to city analysts.
The Bush administration announced last week that it is taking control of the two institutions to avert the potential for major financial turmoil. Their bankruptcy could have triggered an economic collapse.
Between them, Freddie Mac and Fannie Mae finance or guarantee nearly half of the outstanding mortgages in the US, but they have lost 14 billion dollars (£8bn) in the last year and are likely to pile up billions more in losses until the housing market begins to recover.
US president George Bush said that allowing the companies to fail or further deteriorate would damage the home mortgage market, and could weaken other credit markets that are unrelated directly to housing. There was a fear total meltdown of the US economy was only weeks away.
The effective government takeover will lead to major changes in how the two mortgage giants are run. As part of the changes, the management of the two companies will be replaced while the firms will be given access to extra funding to support their business in the short term.
The companies’ bonds are held by banks and other institutions around the world, so the bail-out will have an international knock-on effect.
It could mean a boost in confidence for UK lenders, leading to the greater availability of mortgages. Double-digit gains for banking stocks sent the London market almost 4% higher after the bail-out although the long term impact of the moves remains to be seen.
