Fannie, Freddie bailout greeted with cautious optimism

By Pedro Nicolaci da Costa

NEW YORK (Reuters) - U.S. mortgage rates fell on Monday after the government seized control of Fannie Mae and Freddie Mac, raising hopes the plan would provide at least temporary respite from troubles in housing and credit markets.

Stock prices rallied around the world as investors felt that federal backing could stem some of the pain that has crippled the financial system for over a year.

However, the bailout of the country's two biggest mortgage finance companies, which may prove the costliest ever, was a still a symptom of the dismal state of capital markets more than a year into the crisis, analysts said.

The immediate reaction to the U.S. government's commitment of up to $200 billion to support the two giant mortgage lenders, which together back about half the country's $12 trillion in mortgages, was positive.

Thirty-year mortgage rates fell about a half percentage point from Friday to 6.0 percent, according to Bankrate.com, helped in part by the Treasury's decision to buy mortgage-backed securities issued by Fannie Mae and Freddie Mac.

The Dow Jones industrial average surged 293.52 points or 2.6 percent, while the FTSEurofirst stock index closed up 3.3 percent.

"The Treasury's announcement that it will place the government sponsored enterprises into conservatorship and purchase agency mortgage-backed securities is a very positive step for the housing market and the broader economy," said Jan Hatzius, economist at Goldman Sachs.

The stocks of Fannie Mae and Freddie Mac themselves plunged over 85 percent though, since the Treasury's plan explicitly ruled out any protection for existing shareholders. After losing most of their value in the past year, the stocks were around 70 cents per share on Monday.