More on the seizure of Fannie Mae and Freddie Mac.......

Yesterday I wrote a post outlining some details of the Federal Housing Finance Agency's takeover of Fannie Mae and Freddie Mac.

Today I want to expand on that post and bring up some other discussion points.

First, let's be clear that the failure of these two entities represents the #1 and #2 largest financial institution failures in history. As such we should be aware that the impact will not be minimal, in fact I think we'll be feeling the pain for years. While the markets reacted favorably to the takeover, the exuberance will be short lived as the reality of the state of the mortgage industry sets in.

Let's start with the portfolio limits that will be imposed on these companies. They shall not exceed $850 billion as of Dec. 31, 2009, and shall decline by 10 percent per year until the portfolio reaches $250 billion.......given that Fannie's portfolio was $758 billion at the end of July, and Freddie's was $798 billion, that's a HUGE reduction.

Additionally it was announced that lending standards will remain tight and remember that the new FHA loan limits that went into effect on March 6, 2008 will expire on 12-31-08.

Former Federal Reserve Bank of St. Louis President William Poole stated that the government is aiming ``to prevent the mortgage market from falling apart,''. It is believed that the Treasury's funds will be needed for a long time, in order to clean up this debacle.

What this says to me is that by 2010 obtaining a conventional loan may become more difficult and that the overall housing market will feel the pain as loans may not only get harder to obtain, but down payment requirements will probably increase.

While interest rates are expected to drop in the short term, some are expecting the Federal Reserve to start raising interest rates in the not too distant future in order to support the dollar.

For those home buyers sitting on the sidelines, loan and interest rate considerations should be right up there with the pricing of the house. For all tax payers, we should be paying attention to both national and local politicians and their voting records on issues that directly impact how these companies operated both in the past and how they will operate in the future.