The day that many predicted was coming has arrived, the Federal Government has decided to step in and take over the reigns of Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac are publicly traded companies, but were created by the government to serve the housing market. Fannie Mae was created in 1938 and became a publicly traded company in 1968. Freddie Mac was created by the government in 1970 to provide competition for Fannie Mae.

Why the takeover?

The government deemed that Fannie Mae and Freddie Mac had sustained too much in losses to go on without government intervention. Treasury Secretary Henry Paulson said today "Our economy and our markets will not recover until the bulk of this housing correction is behind us." He went on to say that the government has now come to a consensus that Fannie and Freddie could not continue in their current form.

Clearly the government decided that the risk of the two companies failing was too high to let this get any further along. Fannie and Freddie together own or guarantee around $5 trillion in mortgages, about half of the total outstanding in the United States. A failure of that magnitude would have rocked the housing market like no one could even imagine.

What happens now for Fannie and Freddie?

Fannie Mae and Freddie Mac were put into a conservatorship, which allows their stock to keep trading in the markets, but also puts common shareholders last in line for any claims. The Treasury can purchase up to $100 of a special class of stock in each company to maintain a positive net worth. The Treasury will immediately be issues $1 billion of such stock from each company, which will pay 10 percent interest. The government will also be buying mortgaged backed securities from the two firms in an effort to broaden acess to mortgage funding for homeowners. Essentially what has happened here is that the Federal Government has become the nation's mortgage lender so that it can try to boost investor confidence in the overall economic system.

What does it mean to the housing market?

This move will certainly be a relief to many financial institutions, but this is definitely not going to put an end to the problems in the housing market. The takeover does nothing to change the fundamentals of the housing market, which are extremely bleak. The latest numbers continue to show inventories rising while potential home buyers continue to sit on the sidelines. Existing home values also are taking major hits, and this deal will likely do nothing for them, at least in the short run. The government is hoping that this move will eventually lure more potential homeowners to step up to the plate, but that remains to be seen.

What does this move mean to the stock market?

The stock markets reaction to this news will be very interesting to track. The initial reaction overseas and in the futures markets is very positive, but with the way the market is today that can change at any time. The belief is that many investors may find this welcome news because it means that the financial system is safer than it was on Friday afternoon. The big caveat here is that the United States Government itself is carrying a massive deficit and the losses that continue to mount for Freddie and Fannie won't do anything to help that.

In the financial sector, Fannie Mae and Freddie Mac's stocks will certainly plunge on this news. As noted above, common shareholders will be last in line of claims in the conservatorship, and with no known end to the conservatorship, there is unlikely to be much buying in these two stocks. The rest of the financial sector is likely to get a little bit of a bounce as investors see this as a sign that things may be closer to hitting rock bottom.

The truth is, this is a very fluid situation that will require some close watching in the coming weeks and months and the true effects may not be known for quite some time.