Following a weekend workout session in early September, the U.S. Treasury made an intrepid move to steady the shaky housing market by announcing a takeover of mortgage giants Fannie Mae and Freddie Mac. Home builder stocks blipped and interest rates dipped in the immediate aftermath, but analysts and economic experts warn that the decision is hardly a silver bullet for the troubled real estate industry.

FANNIE/FREDDIE MAYDAY: U.S. Treasury Secretary Henry Paulson seeks to stablize the housing industry through the placement of Fannie Mae and Freddie Mac in conservatorship. Photo: Getty Images Builder stocks rallied strongly on the news, with many in the group posting increases of nearly 20 percent at market opening the following day. By mid-afternoon, most had settled back to gains between 7 percent and 13 percent.

Mortgage rates fell dramatically in the days following the announcement, much to the surprise of stakeholders. Many economic experts had predicted that the takeover would shave 30 to 40 basis points off interest rates by the end of the year. In its Sept. 11 nationwide survey, Freddie Mac reported that 30-year, fixed-rate mortgages dropped below 6.0 percent, the lowest level since mid-April.

"It's good news, because the alternative would have been far worse," says Bert Ely, a financial and monetary policy expert who runs Ely & Co in Alexandria, Va. "We maintain the status quo, but we still have very serious problems to work through."

The alternative, says Ely, would have been to let both government-sponsored entities (GSEs) fail, which would likely have completely collapsed the already moribund market for mortgage-backed securities that ultimately provide the funding for home loans.

However, the takeover's consequences will not reach the whole of the housing market, he warns. "Stronger borrowers are going to be able to get cheaper money, but this does not mean your weaker borrowers are going to have it any easier getting credit than they did before."

Brian Bethune, chief U.S. financial economist for Global Insight, says that in addition to the takeover's positive influence on rates, the implicit government backing of Fannie and Freddie should help ease the credit crunch. "On net, it should have a slight positive effect on availability of capital," notes Bethune. "I think some of these mortgage-backed securities will get a lift. But it's not going to be a cure."

The reasoning behind this argument is that several factors outside the purview of the financial markets are driving the current dynamics of the housing market. Tightening credit standards, declining home prices, and inventory overhang are rolling up into a slow recovery for home building.

Home builders had mostly positive responses to the takeover.

Says Chad Dreier, president and CEO of The Ryland Group, "We are encouraged by the possibility that the government's takeover of Fannie Mae and Freddie Mac may drive down mortgage rates and create some renewed demand for new homes among qualified buyers. Also, the government's effort to help restore confidence in the financial markets is a good thing for both the housing market and overall economy."

"Now with the tax credit in play, and this recapitalization commitment by the government, the necessity to clear the market of re-sales–both people who are living in their homes and want to sell them and the supply of foreclosure properties–and the overhang of new-home properties now has the beginning of a solution," notes Larry Mizel, CEO of M.D.C. Holdings. "A cure has started, substantially, and we'll now be able to begin to clarify the baseline for new-home demand. I feel confident that we'll find that the lines between new-home supply and demand will cross again, and we'll need to work to meet demand again. It may take a couple of years."

"The takeover by the government, which many people have been waiting to happen for some time, confirms the guarantee that the GSEs have been backed by the government, which should restore some confidence in their ultimate viability," says Fred Cooper, senior vice president for finance and investor relations at Toll Brothers. "It removes a cloud of doubt about their ability to survive their crisis, and will hopefully bring mortgage spreads down and improve liquidity."

For Alan Shapiro, president of Bethesda, Md.-based Winchester Homes, the takeover won't save the housing market, but it won't sink it either.

"It'll be–if nothing else–something that keeps us in neutral," explains Shapiro. "The fundamental problems are still there. Inventory still needs to come down. So, I don't see it as a great help, but I see it as a good step to keep us on the path for recovery."

In addition to the establishment of a secondary market for mortgages and a decline in interest rates, for former mortgage industry executive and current CEO of Florida-based Holiday Builders Kim Shelpman, the pluses of the government intervention also include the standardization of lending guidelines. Shelpman says that the mortgage pendulum has swung so far from the fast-and-loose lending of the boom times to where it's "practically impossible" to get a mortgage today. She expects the government takeover to provide some consistency on the lending side, returning "lending to the pre-boom time when decisions were made prudently on a consistent basis and everyone understood the guidelines."

–Teresa Burney, Bill Gloede, and Sarah Yaussi

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