Sunday it was announced that the government, through the Federal Housing Finance Agency, was making the landmark, although not altogether unanticipated, decision to take over the Federal National Mortgage Association (FNMA-Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).

After suffering from the biggest number of mortgage defaults in 30 years, the two giants are in serious danger of failing and delivering a major blow on the already stressed housing market . In a nutshell, they're worried the mortgage market will fall apart. The end goal is to restore confidence, mainly abroad and at home, for those financial institutions that hold these companies' securities.

Fannie Mae and Freddie Mac together own or guarantee about $12 trillion in mortgages or about half of the US mortgage market. FNMA was formed after the great depression, as part of FDR's New Deal, to provide liquidity to the mortgage market. Freddie Mac was created in 1970 to expand the secondary market for mortgages.

Here are some details of the takeover:

• It's anticipated it could cost as much as $100 billion for each company
• The Treasury will receive $1 billion in preferred stock, warrants totalling about 79.9% of Fannie and Freddie
• The Treasury will start with a $5 billion purchase of mortgage-backed securities
• Both companies will be placed under a conservatorship, both CEO's will be replaced, but remain as consultants
• All dividends will be suspended
• The takeover is "temporary" until a future operating or restructuring plan is hammered out
• Common stock holders will remain, but be last to receive any compensation
• Interest and principal payments will continue to be made on outstanding debt
• All lobbying efforts by both companies will stop immediately

If you have followed this story you may already know that when problems first started to surface we were all assured that everything was fine and that government intervention was not necessary. Problem is that the accounting methods used by these companies overstated the value of their securities and due to the mounting losses it was paramount that they raise more capital.

FNMA is required to have $37.5 billion on hand to meet capital requirements and it had fallen in less than 2 months from $47 billion to $7.6 billion......scary. Freddie was down to $3.3 billion from $33 billion.....again, scary.

It was decided that without a takeover the risk was simply too great for taxpayers for the government to keep infusing capital. From where I'm sitting it does not look good any way you dissect this thing, although the alternative of doing nothing could be far worse.

Many critics, including Steve Forbes and Alan Greenspan believe these companies have been mismanaged and need to be split and sold off. Many in the mortgage industry see this as a positive step in shoring up the sagging mortgage market, while some worry it may not be enough. In the short term long term mortgage rates could dip by as much as 1%, if certain mortgage pundits are correct.

Some lingering questions include:

What happens next? While the goal is to"preserve and conserve" the value of these companies, no end date or time frame exists for ending the conservatorship.

Will key benchmarks or the Treasury plan be met and will that be enough to stabilize the mortgage market?

Will the people who need to be helped get that help?

More to come on this story.........