US acts to save Fannie and Freddie

The financial news yesterday was dominated by the US government's decision to secure the financial future of the two key players in the US mortgage market. The companies involved are called Fannie Mae and Freddy Mac. It seems to me that there are three key questions that relate to this action which is by far the most important since the credit crisis started.

1) What do these companies do?
Fannie Mae is the nickname for the Federal National Mortgage Association.
Freddy Mac is the nickname for the Federal Home Loan Mortgage Corporation.
These two companies play a crucial role by injecting liquidity in the US mortgage market. Their job is to purchase mortgages from a list of approved lenders and then sell them on to a range of investors worldwide. This means that they effectively guarantee or own outright up to a half of all US mortgages. If these companies failed the US mortgage market would collapse which would then have resulted in a meltdown in the US housing market. This would have led to dire consequences for the US economy and therefore the world's economic prospects.

2) Why are they in trouble?
Put simply, they have made huge financial losses resulting from their guarantees on billions of dollars in mortgages which have now failed as home owners have defaulting on their loans. They would normally be forced to raise additional funds from investors but this is not possible in current market conditions.

3) What has the US Government done to save them?
It has injected $100bn into each company.
It is buying mortgage bonds issued by the two companies.
Lastly, it has provided a last resort backstop lending facility of unlimited size.

This means that the US Government has effectively acted to provide a complete support package to underwrite the activities of these two companies.