Impact On You Of Mortgage Giants' Takeover

With Washington taking over mortgage goliaths Fannie Mae and Freddie Mac, many current and would-be homeowners are wondering what effect the move is likely to have on them.

On The Early Show Monday, Treasury Secretary Henry Paulson told co-anchor Harry Smith the government had no choice but to act, saying, "A failure by either one of these companies would cause great havoc in the economic system. It would be a big blow to the average American. (It would) affect their budget, their ability to get a consumer loan, a car loan."

And Early Show personal finance contributor Vera Gibbons addressed questions from people on the street.

From Ashley Walker, of Lumberton, N.C.:

How is this going to affect the housing market? Is it going to make it harder for first-time home buyers to get a loan? ... Every month, you hear about foreclosure rates going up; what does this mean to us?

For starters, Gibbons explained, more liquidity in the financial system -- a $200 billion cash infusion -- will mean more financing options for first-time home buyers. More credit will be available. Mortgage rates should stabilize, and may even come down as much as a full point. But the takeover won't do much to prevent home prices form continuing to decline. It's not going to solve the foreclosure mess. Some 1.2 million homes are in foreclosure nationwide. And it's expected that the foreclosure rate will continue to rise. We need to wipe out some of that excess housing inventory (too many on up for sale) for the price situation to stabilize.

"It's all about providing stability and credibility back to the market," Gibbons observed.

From Joe Marr, of Oceanside, on Long Island, N.Y.:

"Why is the government helping out?"

The reason the government is helping Fannie and Freddie out is to stabilize the market for mortgage-backed securities, to put them in position to create greater financing opportunities for home buyers and homeowners, and to ultimately avert a collapse here. Adds Gibbons, "It's about bringing stability back, instilling a sense of confidence, alleviating the fears, the uncertainty that's out there. This is a big, expensive intervention, but it's necessary. Over 50 percent of the loans pass thru the hands of Fannie and Freddie. They're the glue that holds the housing market together." Keep in mind: Together they own or guarantee about $5 trillion in home loans. If the government didn't act, there could have been a "complete disaster for financial markets here and abroad," with its obvious implications for the broader economy and economic growth.

From Jerry Mathews, of Waldwick, N.J.:

What happens to the investors have put into (Fannie and Freddie)? Do they lose it all, or get some of it back from the government?

There's been a 90 percent decline in Fannie and Freddie shares over the last year, with more expected today. The biggest losers will be mutual funds. But the lesson here to small investors is that diversification is key.

From Marcia Weinstein, of Freehold Township, N.J.:

Is this a good time to get a second mortgage? Or is it going to be harder at this time?

Fannie and Freddie don't back second mortgages -- banks, credit unions and mortgage companies do -- and those are typically privately funded. But there cud be ripple effect as things sort of stabilize, but we won't see any sort of dramatic impact on second mortgages. Market stability may mean greater opportunities to get such loans at banks, credit unions and mortgage companies. Some who've stopped offering them may get back into it, but it's not as if there' suddenly going to be some huge opportunity for second mortgages!