Fannie Mae and Freddie Mac have been taken over by the government,  Lehman Brothers declares bankruptcy, Merrill Lynch sold to Bank of America, AIG bailed out, and what is going on with WAMU and Wachovia?

Let’s focus on the mortgage part of this:

Last week Treasury Secretary Paulson announced that the federal government was seizing control of Fannie Mae and Freddie Mac and placing them under a government conservatorship.   This means that the federal government now essentially owns the majority of mortgage debt in the country. 

The move was an effort to prevent the collapse of both agencies, who have been losing money because of the housing slowdown and increased delinquencies and foreclosures.  Fannie Mae and Freddie Mac’s losses eroded their capital reserves and they were unable to raise enough new capital, despite previous attempt by the Treasury Department to help shore them up. 
Treasury Secretary Paulson has said that a failure of either company would cause great havoc in the economic system.  In the NY Times, he was quoted as saying, “This turmoil would directly and negatively impact household wealth: from family budgets, to home values, to savings for college and retirement. A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance. And a failure would be harmful to economic growth and job creation.”

The purpose of the takeover was to ensure that the flow of money will be available so that banks will still be able to sell their loans to Fannie and Freddie.  If Fannie and Freddie were not open for business, the credit crunch would be much, much worse, because banks would have less access to capital, and fewer buyers for their loans.  This would likely cause rates to go up and lending to tighten even further.

Has it helped?

So far, rates are down about a quarter of a percent, dropping from an average of 6.5% last week, to averaging around 6.25% today on a 30 year fixed rate mortgage.  The hope is that the move will lower mortgage interest rates, and help the housing market recover.  However, the bond yield, which affects mortgage interest rates most directly, was down at 3.41 as of close of business yesterday.  This would usually indicate mortgage rates in the mid 5% range, but rates remain just under 6% for most 30 year fixed rate mortgages.
What effect will the changes on Wall Street have on home sales?
I am not sure anyone can reliably answer that question at the moment.
So what should we do?

I think the best thing we can do is to calm buyers’ fears, and remind them:

1. Rates are still quite low, and mortgage money is available through
   a variety of loan programs. Fannie & Freddie are still lending money,
   as are the FHA, VA and SONYMA.
2. Home prices have come down, so it is a great time to get a good deal if you are a buyer.
3. Let people know about programs like the $7,500 First time Buyer Tax Credit that is available through July 2009.