WORLD> America
US spells out Fannie-Freddie backstop plan
Updated: 2008-07-14 09:49

Washington - The US Federal Reserve and the Treasury announced steps Sunday to shore up mortgage giants Fannie Mae and Freddie Mac, whose shares have plunged as losses from their mortgage holdings threatened their financial survival.

This May 2, 2007 file photo shows the Fannie Mae building in Washington. The US Treasury and the Federal Reserve announced steps Sunday, July 13, 2008 to shore up mortgage giants Fannie Mae and Freddie Mac.  [Agencies]

The steps are also intended to send a signal to nervous investors worldwide that the government is prepared to take all necessary steps to prevent the credit market troubles that started last year from engulfing financial markets and further weakening the economy and housing markets.

The Fed said it granted the Federal Reserve Bank of New York authority to lend to the two companies "should such lending prove necessary." They would pay 2.25 percent for any borrowed funds -- the same rate given to commercial banks and Big Wall Street firms.

The Fed said this should help the companies' ability to "promote the availability of home mortgage credit during a period of stress in financial markets."

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Secretary Henry Paulson said the US Treasury is seeking expedited authority from Congress to expand its current US$2.25 billion line of credit to each company should they need to tap it and to make an equity investment in the companies -- if needed.

"Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies," Paulson said Sunday. "Their support for the housing market is particularly important as we work through the current housing correction."

The Treasury's plan also seeks a "consultative role" for the Fed in any new regulatory framework eventually decided by Congress for Fannie and Freddie. The Fed's role would be to weigh in on setting capital requirements for the companies.

The White House, in a statement, said US President Bush directed Paulson to "immediately work with Congress" to get the plan enacted. It also said it believed the plan outlined by Paulson "will help add stability during this period."

Investors may not be as sanguine, however, according to Chris Johnson, an investment manager and president of Johnson Research Group in Cleveland. Stocks of financial institutions "are going to get clobbered," he predicted. "It is a situation where regulators and the government are trying to play catch up, and that means everything is not discounted in the stock prices yet."

The Dow Jones industrials on Friday briefly fell below 11,000 for the first time in two years and Johnson expects shares of investment banks and regional banks could fall even lower as investors react to this weekend's developments.

Fannie Mae and Freddie Mac either hold or back US$5.3 trillion of mortgage debt. That's about half the outstanding mortgages in the United States.

The announcement marked the latest move by the government to bolster confidence in the mortgage companies. A critical test of confidence will come Monday morning, when Freddie Mac is slated to auction a combined $3 billion in three- and six-month securities.

Fannie was created by the government in 1938 to provide more Americans the chance to own a home by giving financial institutions an outlet to sell mortgage loans they originated, freeing more cash to make more home loans. It moved from government to public ownership in 1968 and Freddie was started two years later.

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