TOPICS > Economy

U.S. Government Takes Steps to Back Struggling Mortgage Giants

BY Admin  July 14, 2008 at 11:15 AM EST

Treasury Secretary Henry Paulson

Treasury Secretary Henry Paulson is asking Congress to increase the companies’ existing line of credit at the Treasury, and for the authority to buy unlimited stakes in the companies.

“[Their] 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,” Paulson said in a statement that he read on the steps of the Treasury building Sunday evening.

The credit increase would be added to the current line of $2.25 billion each and would be temporary, potentially for 18 months.

Paulson’s proposal is anticipated to be incorporated into an existing congressional housing bill and approved this week.

The Federal Reserve, in a separate announcement, said it will give the companies access to its discount lending window to provide additional credit in an emergency. The move could mean a major escalation in U.S. taxpayer exposure, according to Reuters.

The central bank said the decision was made “to promote the availability of home mortgage credit during a period of stress in financial markets.”

Shares for Fannie Mae and Freddie Mac, which buy or finance almost half of the $12 trillion of U.S. mortgages, plummeted last week over concerns that they might not have enough capital to handle losses from bad home loans.

The two companies have been struggling for months, with the value of shares of the companies dropping some 75 percent in the last year. Both companies are publicly traded, but are chartered and government-sponsored enterprises.

Analysts said the moves Sunday would help solidify the government’s role in shoring up and guaranteeing the debt sold by the companies.

“It is time to recognize that the [government sponsored enterprises] were always dependent upon government support and now we must make the implicit explicit,” Christopher Whalen, co-founder of independent research firm Institutional Risk Analytics told Bloomberg News.

Shares of Fannie Mae and Freddie Mac fluctuated Monday morning, spiking early in the day, but losing those gains within the first half-hour of trading, before inching into positive territory. Freddie Mac’s $3 billion debt auction was in high demand Monday morning, a sign that investors have confidence in the company and are willing to provide liquidity.