Fed Resuce of Mortgage Giants Planned

By Mark Impomeni
Jul 14th 2008 12:00AM

Filed Under:eBush Administration, Senate, Economy

The Federal Reserve and the Treasury Department announced plans today to throw troubled mortgage giants Fannie Mae and Freddie Mac a lifeline, granting the Federal Reserve Bank of New York authority to lend money to the companies for the first time. The companies were created by the federal government to broaden access to home ownership. Both have since transitioned from government owned to privately owned companies. Together, they hold or guarantee $5.3 trillion in mortgage debt, nearly half of the outstanding mortgages in the United States. A loan backed by either Fannie or Freddie implicitly carries a federal guarantee, potentially putting taxpayers on the hook for the debt if the companies fail.

Treasury Secretary Henry Paulson downplayed the possibility of a takeover of either mortgage guarantor, saying that Fannie and Freddie play a vital role in the housing market.
"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."
Shares of both companies are down close to 75% since the beginning of the year, raising concern amongst investors that neither company would have enough cash available to back all the loans they hold, should they come due.

For now, the Administration is only considering lending money to Fannie and Freddie to prop up its balance sheet in hopes of calming nervous financial markets. Democratic leaders in Congress seem to be on board with the emerging plan, so far. Senate Banking Committee Chairman Sen. Chris Dodd (D-CT) stressed that the companies are financially sound. "What's important here are facts," he 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." Sen. Charles Schumer (D-NY), head of the Joint Economic Committee of the House and Senate, lent his support to the Administration's efforts. "Treasury's plan is surgical and carefully thought out and will maximize confidence in Fannie and Freddie while minimizing potential costs to U.S. taxpayers," Schumer said.

The health of Fannie Mae and Freddie Mac is essential to the U.S. economy, especially during this rough patch. The loans held by the two companies would nearly double the federal debt should the government be forced to provide a liquid guarantee for them. In the event that one or both of the companies fails, the federal government would almost certainly move to bail them out, or else risk massive disruptions in financial markets. This is one issue on which there will not be much partisan rancor in Washington. Both parties realize the danger to the American economy of playing a game of partisan chicken with the state of the nation's mortgages. Nothing less than the credibility of the American economy and financial system is at stake.

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