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Fannie Mae (FNM) and Freddie Mac (FRE) – Crisis Averted?

The past week has been simply brimming with new developments in the national mortgage crisis. On Sunday, industry giants Fannie Mae and Freddie Mac received clearance from the government to tap into the Federal Reserve’s discount lending window, a necessary measure for which few had ever anticipated the need. However, with the bottom having fallen out of the housing market, both government-sponsored entities were found to require immediate aid. Over the course of the week the action seemed, at least temporarily, to quell the potential for total meltdown.

While many are opposed to government bailouts, the ramifications of allowing the situation to escalate could have been catastrophic. The two firms own or guarantee more than five trillion dollars in mortgages, and a total collapse would likely cause a national – and arguably, global – economic destabilization. It lends truth to past assumptions that Fannie and Freddie are simply too critical a part of the American economy for the government to allow them to fail.

The companies, however, are not exactly floundering helplessly. On Friday, Freddie Mac filed a Form 10 with the SEC that would involve the issuance and sale of about ten billion dollars in new shares. Relief to the tune of $510 million is on the horizon for Fannie Mae, following the redemption of certain securities set for July 29th.

Despite the momentary fix, the two lenders are not out of the woods yet. Were the mortgage downturn to continue, resulting in a greater number of loan defaults, assistance that has been made available could still prove insufficient. The real hope is that this narrow escape from potential disaster will create a lasting impression, be taken as a valuable lesson, and help to prevent similar occurrences in the future. For now, a relative equilibrium has been attained, and mortgage investors are breathing a collective sigh of relief.

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