US government to rescue two crisis-hit lending giants

The Federal Reserve and the US Treasury announced steps tonight 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% – the same interest rate given to commercial banks and big Wall Street firms.

US Treasury secretary Henry Paulson said the government was planning to expand its current line of credit to the two companies should they need to tap it and Treasury could buy equity capital in the companies – if needed. The moves will require congressional approval.

The Federal Reserve said in a separate statement that it would lend to Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation) if they needed additional funds.

The plans 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 US$5.3 trillion (€3.33 trillion) of mortgage debt. That is about half the outstanding mortgages in the US.

The department, the Fed and other regulators were in close consultation throughout the weekend after investor fears about the companies’ finances sent the companies’ stock plummeting in trading last week.

Mr Paulson is working closely with congressional leaders to present 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.

“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,” Mr Paulson said today.

“Their support for the housing market is particularly important as we work through the current housing correction.”