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 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.”
Secretary Henry Paulson said the Treasury is seeking expedited authority from Congress to expand its current $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.
The Treasury’s plan also seeks a “consultative role” for the Fed in any new regulatory framework decided by Congress for the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. The Fed’s role would be to weigh in on setting capital requirements for the firms.
The White House, in a statement, said President Bush directed Paulson to “immediately work with Congress” to get the plan enacted.
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.
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.
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.
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.