Will U.S. takeover of mortgage giants work?

WASHINGTON, Sept. 7 (Chinese media) -- The U.S. government

announced Sunday a historical plan to take over the countries' two mortgage

giants Fannie Mae and Freddie Mac.

This is the third time and also the biggest step this year that the U.S. authorities have made a big policy

announcement in efforts to recover the country's mortgage market and the economy

as a whole.

Under the plan, Fannie, formed after the Great

Depression and spun off in 1968, and Freddie, created in 1970, will be placed

into a government-run conservatorship.

Though not all of the plan details have been

revealed, it is expected that tens of billions of dollars from taxpayers will be

poured to buy the two companies' securities.

It appears that investors who own the companies' common stock will be virtually wiped out. Preferred shareholders, who have priority over other shareholders, may also end up with little. Holders of debt, including many foreign central banks, are expected to receive government backing.

A MOVE TO RECOVER MARKET, ECONOMY

The two companies' performance is crucial to the U.S.

mortgages sector as they own or guarantee almost half of the country's total12

trillion U.S. dollars in outstanding home mortgage debt.

Their combined losses of nearly 14 billion dollars in

the last 12 months have aroused concerns over their sustainability in the

business.

As Treasury Secretary Henry Paulson put it in an

announcement, they "are so large and so interwoven in our financial system that

a failure of either of them would cause great turmoil in our financial markets

here at home and around the globe."

"Our economy and our markets will not recover until

the bulk of this housing correction is behind us," he said.

He hoped that the latest move on providing fresh capital to the two firms will eventually lead to lower mortgage rates, stimulate home buying demand and stabilize house prices that have plummeted.

"The clarity and certainty it will provide to the status of the two institutions should have a stabilizing effect on the markets, banking system and the mortgage industry," Federal Insurance Deposit Corp. Chairman Sheila C. Bair said in a statement.

EFFECT UNCERTAIN

Overall, the government's announcement has been

hailed by the Wall Street as a positive measure.

For those financial giants around the world such as

Citigroup,Merrill Lynch and UBS that have huge investment in U.S. mortgage

market, the move should be interpreted as good news.

As a result of the government's intervention, the

cost of borrowing for Fannie Mae and Freddie Mac should decline, because the

government will be insuring their debts. And because the government is backing

the companies, they will continue to buy and sell home loans.

Some analysts, however, have doubted the move's

effect.

Given the enormity of housing's decline in the United

States where prices have seen a fall of about 20 percent from their peak in 2006

and the rise in the supply of homes for sale boosted by building boom and

pessimism on house appreciation, some said the federal takeover was not enough

to halt the decline in home prices in a short time.

They also said the success of the move depends partly

on whether it could draw capital from both domestic and foreign sources.

As the U.S. government is already witnessing a

mounting fiscal deficit and the country as a whole has a current account

deficit, a commitment of the government balance sheet must be supported by other

capital inflows.

Only when such capitals are crowded in, the market

can be stabilized and the prospect for a U.S. economic recession can be eased to

some extent.

Also as the plan failed to address the question of

whether the companies will be nationalized, privatized or kept as

government-sponsored enterprises, the companies' long-term prospects remain

unclear and investors' confidence would be unlikely to be fully restored simply

with the takeover.