MercoPress. South Atlantic News Agency

US government bails out mortgage finance companies

The United States government has announced sweeping measures to shore up the nation's two largest mortgage finance companies, Freddie Mac and Fannie Mae.

The plan calls on Congress to expand the companies' current line of credit and allow the Treasury to buy equity capital in the companies if needed. Freddie Mac and Fannie Mae guarantee almost half of all US home loans. Their share prices fell nearly 50% last week amid fears that they might have trouble raising funds. The BBC's Greg Wood in New York says the emergency measures are meant to allay fears that the two companies are about to run out of money. Announcing that new credit lines would be sought from Congress, Treasury Secretary Henry Paulson said: "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." He added that their "support for the housing market is particularly important as we work through the current housing correction". The Federal Reserve also said it would lend to Fannie Mae and Freddie Mac if they need additional funds. The two firms play an important role in the financial markets in providing funding for home loans by buying up mortgages and packaging them as investments. As mortgage backers, the companies have had to pay out when homeowners have defaulted on their loans. Last week, investor concern that the government might have to bail out Fannie Mae and Freddie Mac because of the huge losses they have suffered in the US property crash sent their shares plummeting If either firm were to fail, the consequences for the already fragile US financial system would be disastrous as mortgage lending could virtually dry up, our correspondent says. Both firms have defended their finances, saying they had enough capital to weather the housing slump. Freddie Mac is due to sell 3 billion US dollars in short-term debt on Monday, which will be a critical test of confidence in the mortgage companies. Freddie Mac and Fannie Mae are both privately-owned companies mandated by the US Congress to provide funding to the housing market. As many private sector banks consider reducing their mortgage business, the US government has increasingly looked to Fannie Mae and Freddie Mac to help restore stability to the market. "Fannie Mae and Freddie Mac play an important role in our housing finance system, and they should continue to play this role in their current forms" White House spokeswoman Dana Perino said in a statement on Sunday. Fannie Mae was founded in 1938, during the depression, when millions of families could not become homeowners, or faced losing their homes, because of a lack of mortgage funds. It was a government agency until 1968 and Freddie Mac was created in 1970. The Sunday release from the US Treasury Department follows: "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. Their support for the housing market is particularly important as we work through the current housing correction. GSE debt is held by financial institutions around the world. Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets. Therefore we must take steps to address the current situation as we move to a stronger regulatory structure. In recent days, I have consulted with the Federal Reserve, OFHEO, the SEC, Congressional leaders of both parties and with the two companies to develop a three-part plan for immediate action. The President has asked me to work with Congress to act on this plan immediately. First, as a liquidity backstop, the plan includes a temporary increase in the line of credit the GSEs have with Treasury. Treasury would determine the terms and conditions for accessing the line of credit and the amount to be drawn. Second, to ensure the GSEs have access to sufficient capital to continue to serve their mission, the plan includes temporary authority for Treasury to purchase equity in either of the two GSEs if needed. Use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer. Third, to protect the financial system from systemic risk going forward, the plan strengthens the GSE regulatory reform legislation currently moving through Congress by giving the Federal Reserve a consultative role in the new GSE regulator's process for setting capital requirements and other prudential standards. I look forward to working closely with the Congressional leaders to enact this legislation as soon as possible, as one complete package".