U.S. acts to save housing lenders

Rescue plan could inject billions, ease mortgage crisis

July 14, 2008|By New York Times News Service

WASHINGTON - Alarmed by the sharply eroding confidence in the nation's two largest mortgage finance companies, the Bush administration asked Congress yesterday to approve a sweeping rescue package that would give officials the power to inject billions of federal dollars into the beleaguered companies through investments and loans.

In a separate announcement, the Federal Reserve said that it would make one of its short-term lending programs available to the two companies, Fannie Mae and Freddie Mac. The Fed said that it had made its decision "to promote the availability of home mortgage credit during a period of stress in financial markets."

An official said the Fed's lending program was approved at the request of the Treasury but that it was temporary and would probably end once Congress approved the Treasury's plan. Some officials briefed on the plan said Congress could be asked to extend the total line of credit to the institutions to $300 billion.

It was the second time in four months that the housing crisis had prompted the government to step in and rescue a major financial institution. In March, the Treasury Department engineered the sale of Bear Stearns to prevent it from going into bankruptcy and causing a shock to the financial system.

The Bush administration's plan was disclosed last night to calm jittery markets overseas and on Wall Street in advance of a debt sale by Freddie Mac this morning. Officials said that after talking to senior lawmakers through the weekend, they expected that Congress would attach the proposals to a housing bill that could be completed and sent to the White House for approval as early as this week.

"The president has asked me to work with Congress to act on this plan immediately," Treasury Secretary Henry M. Paulson Jr. said yesterday on the steps of the Treasury Building.

"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," Paulson said.

While senior Democratic and Republican officials in successive administrations have for many years repeatedly denied that the trillions of dollars of debt they issued is guaranteed, the package, if adopted, would bring the Treasury closer than ever to exposing taxpayers to potentially huge new liabilities.

Officials seemed to suggest, however, that they had little choice. Over the weekend, Treasury officials sought assurances from Wall Street firms that a $3 billion auction by Freddie Mac of short-term debt would go off without a hitch. While $3 billion is a relatively small sum for an institution of Freddie's size, officials said they did not want to risk even a small misstep that could set off a new round of problems.

One senior executive of an investment bank said last evening that the government could not take the chance that the auction would not go well. "The system is under attack," he said.

The failure of just one of the companies could be catastrophic for economies around the world. The companies, known as government-sponsored enterprises, or GSEs, touch nearly half of the nation's mortgages by either owning or guaranteeing them, and the debt securities they issue to finance their operations are widely owned by foreign governments, pension funds, mutual funds, big companies and other large institutional investors.

"GSE debt is held by financial institutions around the world," Paulson said in his statement. "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."

The proposal would give the Treasury secretary authority to determine when to invest in the companies or extend loans to them. Those purchases would be made with the agreement of the companies.

Officials said the proposed investment and lending elements of the plan were to last two years.

While the Treasury did not specify the size of the packages, officials briefed on the plan said they were told by administration officials that, to be meaningful, Congress should consider extending the line of credit to the two institutions to $300 billion.

Each company now has a $2.25 billion credit line, set nearly 40 years ago by Congress. At the time, Fannie had only about $15 billion in outstanding debt. It now has total debt of about $800 billion, while Freddie has about $740 billion. Today the two companies also hold or guarantee mortgages valued at more than $5 trillion, roughly half of the nation's mortgages.

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