U.S. spells out Freddie-Fannie backstop plan

WASHINGTON, D.C. — The U.S. Treasury and the Federal Reserve announced steps Sunday to shore up mortgage giants Fannie Mae and Freddie Mac.

Shares of the two companies have plunged in recent weeks as losses from their mortgage holdings surged, threatening their financial survival.

Secretary Henry Paulson said the government is planning to expand its current line of credit to the two companies should they need to tap it and Treasury could buy equity captial in the companies — if needed. The moves will require congressional approval.

The Federal Reserve saids in a separate statement that it will lend to Fannie Mae and Freddie Mac if they need additional funds.

The plans also seek a "consultative role" for the Federal Reserve 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.

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

The department, the Fed and other regulators were in close consultation throughout the weekend after investor fears about the companies' finances sent the companies' stock plummeting in trading last week.

Paulson is working closely with congressional leaders to his plan as soon as possible as one complete package.

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

"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-owner companies," Paulson said Sunday. "Their support for the housing market is particuarly important as we work through the current housing correction."