The US Treasury yesterday took control of the mortgage giants, Fannie and Freddie in a controversial and previously unheard of move. Freddie Mac and Fannie Mae are responsible for £3,100billion worth of residential mortgages, and failure would have spelt definite disaster for the US and UK housing markets.

On a positive note, the bail out, which could see $200billion injected into the mortgage lenders funds, has shored up the UK’s FTSE 100 as fears over the US arm of the UK’s lending errors disappear.

Under usual circumstances the US would not take such drastic measures, US Treasury secretary, Henry Paulson commented, however, the collapse of Fannie and Freddie could have been fatal for an already critical housing and mortgage market.

The US Treasury is not taking any chances either, both Fannie and Freddie were subject to immediate removal of their chief executives. Commenting on the proposed bail out at its announcement, Mr Paulson said:

“Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner on housing.

“Therefore, the primary mission of these enterprises now will be to proactively work to increase the availability of mortgage finance, including by examining the guaranty fee structure with an eye toward mortgage affordability.”

Though the Treasury refrained from using the word ‘nationalisation’ during the announcement, this is effectively what is happening as shareholders lose the prospect of future dividends.

The UK saw a similar situation with Northern Rock earlier this year, however, Fannie and Freddie account for 25 times more mortgage obligations. Speaking of changes needed to ensure history does not repeat itself in the future, Mr Paulson added:

“Policymakers must address the issue of systematic risk. I recognise that there are strong differences of opinion over the role of Government in supporting housing, but under any course policymakers choose, there are ways to structure these entities in order to address market stability in the transition and limit systematic risk and conflict of purposes for the long term.”

© Fair Investment Company Ltd