Treasury and Fed Outline Plan to Bolster Fannie and Freddie, Calm Markets

Sunday evening the U.S. Treasury Department and Federal Reserve outlined a comprehensive government plan to implement sweeping measures to shore up troubled mortgage lenders Freddie Mac and Fannie Mae. On Monday, in initial trading the rescue plan helped calm markets.  
 
And, in a key test of confidence, Freddie Mac's $3 billion bill sale Monday drew stronger demand than a similar sale July 7. Freddie Mac sold $2 billion of three-month bills at a 2.309 percent rate, compared with a 2.323 percent rate for a same size and maturity deal sold on July 7.  
 
Treasury Secretary Henry Paulson said the Bush administration will ask Congress to enact legislation to temporarily increase the line of credit that the companies have with the Treasury. It would also allow the Treasury to buy stock in the companies.  
 
Paulson also said the Federal Reserve should be given a greater role supervising the finances of Fannie and Freddie.  
 
In addition, the Federal Reserve announced Sunday that the mortgage finance companies can turn to the Federal Reserve Bank of New York for funds. The move gives Fannie and Freddie the same access to the funds as commercial banks and Wall Street firms. The agency granted investment banks such access earlier this year in the wake of a similar crisis of confidence when investors lost faith in Bear Stearns.  
 
The decision by the government to step in comes at a tumultuous time for the two shareholder-owned companies, which own or back $5 trillion in home mortgages and are counted on to play a central role in the recovery of the battered housing market.  
 
At issue is the companies' financial condition and whether their balance sheets are strong enough to continue their business of buying and guaranteeing home mortgages. The plan by the Treasury and the Fed would provide Fannie and Freddie with needed capital. Beyond that, even the promise of government support could be sufficient to calm investors.  
 
Freddie Mac and Fannie Mae guarantee almost half of all US home loans.