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Government will back Fannie & Freddie

Amy Scott Jul 14, 2008
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Government will back Fannie & Freddie

Amy Scott Jul 14, 2008
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TEXT OF INTERVIEW

Bob Moon: Why is the government rushing to the rescue of Fannie Mae and Freddie Mac? Consider that those two firms have accounted for almost 70 percent of all new mortgages this year. Without them, the housing market would all but seize up, so the government is seizing the moment.

Our New York Bureau Chief Amy Scott is with us. Amy, what exactly is the government’s plan?

Scott: Well, the Treasury Department is asking Congress to temporarily increase a line of credit that each of these two companies has. The Treasury’s also looking for the temporary authority to buy equity in either company if needed. Secretary Paulson says the idea is to make sure that they have sufficient capital to continue to serve their mission.

Moon: And what exactly are they hoping to accomplish here?

Scott: These companies either own or finance nearly half of all mortgages in this country — more than $5 trillion worth — so they’re hugely important to the housing market and investors have been questioning whether they have enough capital to cover losses from mortgage defaults.

Allan Mendelowitz is a member of the board of directors at the Federal Housing Finance Board, which regulates the Federal Home Loan Bank System, and he says the move sends a message to the markets.

Allan Mendelowitz: What the government is basically saying is that we’re going to do everything necessary to ensure that these businesses continue to function well in the marketplace and we’re going to everything necessary to restore the markets confidence in these organizations.

Scott: So we’ll be watching today to see how U.S. investors respond. Freddie Mac is scheduled to auction off $3 billion in debt today and analysts will be watching the auction as a sort of gauge of investor confidence.

Moon: OK, here’s the big money question, though: What is this going to mean for taxpayers?

Scott: Well, you know, New York Senator Charles Schumer praised the plan, saying it would minimize the cost to taxpayers. It appears to be designed to boost investor confidence without actually injecting any cash yet, but if the government does end up stepping in and either loaning money to Fannie and Freddie or investing in them, that could certainly leave taxpayers could be on the hook.

Moon: Our New York Bureau Chief Amy Scott. Thank you.

Scott: Thanks Bob.

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