The Treasury Department announced plans over the weekend to extend more credit to Fannie and Freddie and to buy shares in them if needed. In a separate move, the Federal Reserve said it will lend to the firms at the same rate given to commercial banks and Wall Street firms.
The Fed also announced new rules yesterday to crack down on questionable lending practices that contributed to the housing crisis. The rules bar lenders from issuing loans without proof of a buyer's income. They also require lenders to ensure that high-risk buyers set aside enough money to pay for taxes and insurance, among other things.
The series of actions came after federal regulators took control last week of the $32 billion IndyMac Bank, which was failing as a result of its real estate lending problems. Since then, jittery investors have grown increasingly worried that other regional banks could face similar problems, given the housing and credit crunch.
The plan to shore up Fannie and Freddie puts taxpayers on the hook to secure the flagging mortgage industry, which has experienced soaring delinquencies fueled by subprime lending during the real estate boom. Some blame the companies for taking on too much risk.
But many experts say Fannie and Freddie are too important to let fail. Both increased their purchases of mortgages after a number of mortgage companies collapsed last summer, leaving a lending gap in the industry.
Fannie and Freddie play a critical role in the economy by buying mortgages from lenders, freeing the lenders to use those funds to underwrite new loans. The two package the loans into securities, which are sold to Wall Street firms.
If either went bankrupt, it would leave a gaping hole in the industry and send mortgage interest rates soaring. In the past decade, Freddie Mac alone has invested $114.6 billion in Maryland mortgages, serving more than 772,000 homeowners and renters, the company says.
"You almost can't overstate the importance of Fannie and Freddie to the development of mortgages and home ownership to Americans," said Jeff Tjornehoj, a research analyst for mutual fund tracker Lipper Inc.
He said the government rescue will save them from bankruptcy, helping investors in the companies and sending a signal to markets that the government will cover their debt. Treasury and company leaders, however, insist that Freddie and Fannie are in no financial danger but that the moves were designed to restore confidence on Wall Street about the businesses.
