The government did the right thing by bailing out mortgage finance giants Fannie Mae and Freddie Mac before their finances deteriorated any further, a UW-Madison School of Business professor says.

"If we learned anything from the savings and loan (crisis of the 1980s and 1990s), it's that firms have incentives to take big risks if they're near bankruptcy," said Morris Davis, assistant professor of real estate and urban land economics.

Sunday's government takeover of Fannie Mae and Freddie Mac will keep their executives from trying any more risky moves to preserve their organizations, he said.

It didn't take long for the takeover to have an impact Monday. Many banks around the country reduced 30-year mortgage rates, from 6.5 percent to about 6 percent, said Greg Dombrowski, president of Johnson Bank Madison. Johnson Bank's rate fell to 6.125 percent and could drop again today, he said.

The government's move "helps to create a sense of calm and a sense of confidence in the marketplace," Dombrowski said.

But Mary Schranz, economics instructor at Madison Area Technical College, said she's concerned about another potential impact of the bailout.

"By the government stepping in, they have now added to our national debt. It just adds to the amount of money our government has to borrow in order to pay off the debt holders of Fannie Mae and Freddie Mac," Schranz said.

The national debt owed to the public already is $5.4 trillion and the budget deficit for the current fiscal year was $370 billion as of the end of July, up about $150 billion from a year ago, Schranz said. Now the government says it may inject Fannie Mae and Freddie Mac with $100 billion apiece.

"My concern is, as taxpayers, we now owe $200 billion more," she said.

The UW-Madison's Davis said, though, if the arrangement is structured the right way, it won't cost taxpayers anything. Over the long term, Fannie Mae and Freddie Mac have been profitable, "so the government is going to get its money back," Davis said.

But Tom Plumb, president of Wisconsin Capital Management, a Madison investment firm, said he thinks the takeover is premature.

"The government pulled out (its) nuclear weapons," Plumb said. "Whether or not this was the time, or whether they would have been needed, nobody will know now."

With the government takeover, U.S. taxpayers now essentially own the bulk of the nation's mortgage market.

The takeover of Fannie and Freddie temporarily puts them in a government conservatorship, replacing their CEOs and taking a government financial stake in the companies. The move could end up costing taxpayers tens of billions of dollars.

Treasury Secretary Henry Paulson said Monday he could not yet estimate the potential burden for taxpayers.
The two together own or guarantee more than $5 trillion in mortgages.

For now, U.S. officials are trying to emphasize the temporary nature of the takeover and minimize the possible risk to taxpayers.

The Associated Press contributed to this report.