Mortgage titans to get help from Fed, Treasury

WASHINGTON — The 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.

The steps also are 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 with losses from subprime mortgages from engulfing financial markets and further weakening the economy and housing markets.

"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," Treasury Secretary Henry Paulson said Sunday. "Their support for the housing market is particularly important as we work through the current housing correction."

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

Paulson said the Treasury is seeking expedited authority from Congress to expand its current line of credit to the two companies should they need to tap it and to make an equity investment in the companies — if needed.

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.

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

Fannie Mae and Freddie Mac either hold or back $5.3 trillion of mortgage debt. That's about half the outstanding mortgages in the U.S. If one or both of the companies were to fail, it would wreak havoc on the fragile financial system and the crippled housing market. The problems would spill over in the national economy, too.

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 had originated, freeing more cash to make more loans. It moved from government to public ownership in 1968, and Freddie was started two years later.

Sunday's announcements are likely to raise anew criticism that the government should have moved sooner to rein in the two companies, especially because investors widely assumed they would be bailed out if they got into trouble.

"Problems are deeper"

The government denied it, but what was seen by investors as an implicit guarantee of support allowed Fannie and Freddie to borrow at rates only slightly higher than the Treasury — and lower than their banking competitors had to pay.

"This really blows away the notion of an implicit guarantee," independent banking consultant Bert Ely said of the Treasury's plan to ask Congress to allow it to make equity investments in Fannie Mae and Freddie Mac. "It suggests a greater concern about how these companies are doing. It says the problems are deeper. It gets to the solvency of the companies, not just the liquidity."

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

Paulson's goal is to get his plan attached to a sweeping housing-rescue package. The Senate and House each have passed bills, and a final package has to be hammered out. The centerpiece of the legislation is to help homeowners avoid foreclosure legislation, but it also contains provisions to revamp oversight of Fannie Mae and Freddie Mac.

"Treasury's plan is surgical and carefully thought out and will maximize confidence in Fannie and Freddie while minimizing potential costs to U.S. taxpayers," said Sen. Chuck Schumer, D-N.Y.

House GOP leader John Boehner, R-Ohio, and Republican Whip Roy Blunt, R-Mo., said they "stand ready to work with Secretary Paulson and congressional Democrats to take appropriate steps to ensure the soundness of our mortgage markets."

Officials from Treasury, the Fed and other regulators worked in close consultation throughout the weekend after growing investor fears about the companies' finances sent their shares and the overall market plummeting last week.

Shares of Fannie Mae plunged 45 percent last week and are down 74 percent since the beginning of the year. Freddie Mac shares fell 47 percent last week and have fallen 77 percent so far this year.

Temporary backstop

Fannie Mae President and CEO Daniel Mudd said he believes the steps could send a calming message.

"Given the market turmoil, having options to access provisional sources of liquidity if needed will help to strengthen overall confidence in the market. We will continue to do our part to provide liquidity, stability and affordability to the housing market now and in the future."

The Fed's offer of funds is viewed as a temporary backstop until Treasury can get its plan in place. The collateral they would have to pledge — Treasury securities and federal-agency securities — is more narrow than the collateral commercial banks and Wall Street firms must pledge for emergency lending privileges.

Hoping to bolster confidence, Senate Banking Committee Chairman Chris Dodd, D-Conn., told CNN on Sunday that Fannie and Freddie are financially sound.

"What's important here are facts," Dodd said. "And the facts are that Fannie and Freddie are in sound situation. They have more than adequate capital — in fact, more than the law requires. They have access to capital markets. They're in good shape. The chairman of the Federal Reserve has said as much. The secretary of the Treasury has said as much."