U.S. Unveils Plan to Aid Mortgage Giants

By Neil Irwin and Jeffrey H. Birnbaum
Washington Post Staff Writers
Monday, July 14, 2008

The federal government unveiled a broad program yesterday evening to bolster troubled mortgage giants Fannie Mae and Freddie Mac, extending unprecedented support to the companies and proposing new authority to lend them money and even buy their stock.

Scrambling to announce the initiative before the trading week began, federal officials said they would allow the firms for the first time to borrow money from the Federal Reserve. Officials are also seeking permission from Congress to temporarily increase the amount the companies can borrow from the Treasury and enable the government to invest directly in the firms if conditions worsen.

The two firms, which dominate the market for U.S. mortgages, have been reeling amid investor concern that the companies might not have enough capital to handle their losses due to the rising number of bad home loans. Both firms' stocks plummeted by almost half last week.

Treasury officials said last night that they were confident Congress will be able to pass the new laws they seek by the end of the week as part of a broad housing bill under consideration on Capitol Hill.

The Federal Reserve announced that it would allow Fannie Mae and Freddie Mac to borrow money on an emergency basis. The firms, should they experience a cash crunch, will be able to exchange certain assets for cash at the Fed's discount window, a privilege long enjoyed by commercial banks and extended in March to struggling investment banks.

If Fannie Mae or Freddie Mac collapsed, it could cripple the U.S. housing market, dealing a staggering blow to the wider economy, and would saddle the federal government with massive debts if it chose to seize control of either firm.

"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 M. Paulson Jr. said in a statement he read before television cameras last night. The strength of their debt "is important to maintaining confidence and stability in our financial system and our financial markets," he said.

A failure of either company would also rattle global financial markets because their shares and debt are widely held by pension funds, mutual funds and foreign governments.

Both companies said they were financially sound but were grateful for the confidence-building efforts. The proposals, taken together, make more explicit than ever that the federal governments backs the two federally chartered companies, even though they are investor-owned.

The changes that Treasury plans would expand the amount that Fannie and Freddie could borrow from the government in the event of cash flow problems. Currently, they can each withdraw $2.25 billion. The Treasury secretary could increase that amount at his discretion.

The Treasury secretary would also have the authority to invest government money in the firms by buying their stock, a step that would only be taken if the firms don't have enough capital and are unable to raise it on private markets.

"Use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer," Paulson said.

CONTINUED     1        >

© 2008 The Washington Post Company