Treasury, Fed to help prop up mortgage giants

updated 12:01 p.m. ET July 14, 2008

WASHINGTON - Scrambling to bolster eroding investor confidence, the Federal Reserve and the Treasury Department announced unprecedented steps to brace slumping mortgage giants Fannie Mae and Freddie Mac.

The companies’ shares, which have plunged as losses from their mortgage holdings threatened their financial survival, opened higher Monday. Fannie Mae rose 27 cents to $10.53, while Freddie Mac climbed 34 cents to $8.08.

The plan, unveiled Sunday, is intended to signal the government is prepared to take all necessary steps to prevent the credit market troubles that erupted last year with losses from subprime mortgages from engulfing financial markets.

The Fed said it granted the Federal Reserve Bank of New York authority to lend to the two companies “should such lending prove necessary.” They would pay 2.25 percent for any borrowed funds — the same rate given to commercial banks and big Wall Street firms.

The Fed said this should help the companies’ ability to “promote the availability of home mortgage credit during a period of stress in financial markets.”

Secretary Henry Paulson said the Treasury is seeking expedited authority from Congress to expand its current line of credit to the two companies and buy shares of the companies — if needed.

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

The Treasury’s plan also seeks a “consultative role” for the Fed 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.

Video   Will credit crisis affect you? July 14: As the federal government reaches out to help struggling mortgage giants, CNBC’s Erin Burnet looks at how the ongoing credit crisis will affect you. Today show

Rep. Barney Frank, D-Mass., the Financial Services Committee chairman, said the House would move by the end of the week to fold “the essence” of Treasury’s proposal into a sweeping housing package, with the goal of clearing it for President Bush by the end of next week.

That package includes a foreclosure rescue to help strapped homeowners get new, more affordable government-backed mortgages through the Federal Housing Administration, and creates a new regulator and tighter controls for Fannie Mae and Freddie Mac.

Frank said he expected only minor changes, if any, to Treasury’s proposal, and said Congress would not seek to impose monetary limits on the government’s line of credit.

Sen. Christopher Dodd, chairman of the Senate Banking Committee, on Monday called the Bush administration’s actions Sunday “probably the right steps” and said he will summon Paulson, Fed Chairman Ben Bernanke and Securities and Exchange Commission chairman Christopher Cox to a committee hearing to answer questions.

“What’s important here as well is to calm people’s fears,” Dodd said in an interview on CBS’ “The Early Show.”

He also drew a distinction between last week’s failure of IndyMac — which engaged in originating riskier mortgages than traditional community and regional banks — and the two mortgage giants.

“There’s a big difference between IndyMac and Fannie and Freddie,” Dodd said. “IndyMac engaged in very bad mortgages, luring people into deals they could never afford. That’s not the case with Fannie and Freddie.” Dodd said that while there may be more bank failures, “I’m more optimistic about Fannie and Freddie than I am about these banks.”

The White House, in a statement, said President Bush directed Paulson to “immediately work with Congress” to get the plan enacted. It also said it believed the steps outlined by Paulson “will help add stability during this period.”

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