WASHINGTON - The Federal Reserve and the U.S. 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 Federal Reserve said it granted the Federal Reserve Bank of New York authority to lend to the two companies "should such lending prove necessary." If the companies did borrow directly from the Fed, they would pay 2.25 percent — the same rate given to commercial banks and Big Wall Street firms.
Secretary Henry Paulson said the Treasury is seeking authority 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. Such moves will require congressional approval.
"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 particularly important as we work through the current housing correction."
The Treasury's plan 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 worked in close consultation throughout the weekend after investor fears about the companies' finances sent their shares plummeting in trading last week. Paulson is working closely with congressional leaders to advance 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 morning, when Freddie Mac is slated to auction a combined $3 billion in three- and six-month securities.
Fannie and Freddie were created by the government to provide more Americans the chance to own a home by adding to the available cash banks can loans customers.
A senior Treasury official said any increase in the line of credit — now at $2.25 billion for each company_ would be at the Treasury secretary's discretion. The same would apply to any equity investment made by the government.
The official, who spoke on condition of animosity, also sought to send a calming message about Fannie's and Freddie's financial shape, saying: "There's been no deterioration of the situation since Friday."
If one or both of the companies were to fail, it would wreak havoc on the already fragile financial system and the crippled housing market. The problems would spill over in the national economy, too.
Paulson on Friday said the government's focus was to support the pair "in their current form" without a takeover.
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 as said as much."
Last week Fed Chairman Ben Bernanke and Paulson, appearing before the House Financial Services Committee, made a point of saying that the regulator of Fannie and Freddie, the Office of Federal Housing Enterprise Oversight, has found both companies adequately capitalized.
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