Paulson announces massive support package for Fannie and Freddie

The US government has in effect guaranteed the future of Fannie Mae and Freddie Mac who between them have or guarantee about 50% of the US mortgage market, with the legally binding promise that they will put in anything up to 100 billion dollars into each of the companies. In return for this the government have taken in the region of 80% of the equity of each (this percentage will increase if the government ever has to make good guarantees), and replaced the two chief executives with their own appointees.

The intervention should help to reduce mortgage interest rates in the US as both companies were finding it more expensive to borrow in the market as there were worries over their financial well being. So with the guarantees allowing them to borrow at a more competive rate they will be able to pass on lower rates to their customers.

The announcment also included a commitment to "moderately increase" lending thus increasing the availability of mortgage finance, which it is hoped will mean the bottom of the market is above where it might otherwise have been.

From a UK perspective it will mean that banks and other institutions that own bonds in the companies can be sure that they will not now suffer serious losses which they would have done if Fannie and Freddie had failed.

One suspects that with this bold step the US economy is now on the way to recovery, which is more than can be said for the UK in the wake of last weeks miniscule (by comparison), aid package for our mortgage market. Although in the US the government hope that their support will in fact mean that they don't need to put any money in, and if they do it will be on a needs basis.