Troubles in the U.S. housing market have been an anchor around the financial markets for months now. Sub-prime mortgages — loans made on questionable terms to risky borrowers — fueled billions in losses for investors, with each new revelation worse than the last. Friday's announcement, made after the markets close, that the Treasury Department was stepping in to take over Freddie Mac and Fannie Mae had the air of the inevitable about it. Foreign holders of the agency debt were demanding it, and the news from the lenders balance sheets kept getting worse and worse with ideas growing they'd been covering up even worse problems.
Initial reaction to the news when markets reopened Sunday night was mixed. Stocks soared, but the dollar sunk and bonds fell as some believed the extra liabilities could swell the U.S. budget deficit. However, it didn't take long for the dollar and bonds to turn around, as the takeover finally means the housing market has a backstop. Housing markets may continue to fall, investment banks that backed bad loans will continue to have trouble and some commercial banks will fail. But Uncle Sam will make sure that money continues to be available to borrowers.
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