Fannie Mae and Freddie Mac takeover is, well, … MASSIVE

The Federal National Mortgage Association (“Fannie Mae”, NYSE: FNM) and Federal Home Loan Mortgage Corporation (“Freddie Mac”, NYSE: FRE) are being put under conservatorship announced by the U.S. Treasury Department today.

Here are links to a number of early reports on the takeover:

MarketWatch: U.S. government takes control of Fannie, Freddie

Bloomberg.com: Paulson Engineers U.S. Takeover of Fannie, Freddie

AP via Yahoo! News: Officials announce takeover of mortgage giants

Let’s be candid here: this is a massive bailout in the form of nationalization of the largest mortgage guarantee organizations in the United States. A statement issued today by James B. Lockhart, director of the Federal Housing Finance Agency, gives the scale of this effort in no uncertain terms:

Between them, the Enterprises have $5.4 trillion of guaranteed mortgage-backed securities (MBS) and debt outstanding, which is equal to the publicly held debt of the United States. Their market share of all new mortgages reached over 80 percent earlier this year…

Soak that in a while. “Equal to the publicly held debt of the United States.” An 80 percent market share of new mortgages.

That’s MASSIVE.

What’s not being said very clearly in any of the mainstream media financial reporting so far is that this constitutes a propping up of the entire banking system in America and that the size of this undertaking required nothing less than a complete takeover of Fannie Mae/Freddie Mac rather than a fractional acquisition by the government of some of their holdings.

It’s also not being said that the ability for homeowners to purchase homes going forward may have been threatened altogether had the Treasury Department not stepped in to intervene as it did.

Another point not being made is that the announcement of this takeover had to be made this weekend; it could not have been done on a weekday, particularly Monday morning, or the stock market would have tanked steeply out of concern for the near-term future. The timing of Bear Stearns’ bailout occurred in a similar fashion back in March; the market responded on Monday but in less dramatic a fashion had the bailout been forced during the week.

It’s likely the market will respond tomorrow with a sizable drop as the financial industry takes stock of the takeover, although it may have taken some of the beating this past week as rumors of the impeding takeover rippled through the market. The Dow Jones Industrial average was down 4.21% over the week, and the Nasdaq was down 6.26%, with much of the downturn occurring on Thursday and Friday.  Standard & Poor’s has already responded today to the Treasury’s move by changing Fannie Mae’s and Freddie Mac’s stock ratings to junk status.

We’ll be watching for the reactions of the presidential campaigns to this news; it will be interesting to see whether the proponents of small government decry or applaud this move toward nationalization of two of the largest financial institutions in the U.S.