WASHINGTON — The Federal Reserve and the Treasury announced steps Sunday to shore up mortgage giants Fannie Mae and Freddie Mac, whose shares have plunged as losses from their mortgage holdings threatened their financial survival.
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 $2.25 billion line of credit to each company should they need to tap it and to make an equity investment in the companies, if needed.
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.
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 plan outlined by Paulson “will help add stability during this period.”
Investors may not be as sanguine, however, according to Chris Johnson, an investment manager and president of Johnson Research Group in Cleveland.
Stocks of financial institutions “are going to get clobbered,” he predicted. “It is a situation where regulators and the government are trying to play catch up, and that means everything is not discounted in the stock prices yet.”
The announcement marked the latest move by the government to bolster confidence in the mortgage companies. A critical test of confidence will come this morning, when Freddie Mac is slated to auction a combined $3 billion in three- and six-month securities.
Fannie was created by the government in 1938 to provide more Americans the chance to own a home by giving financial institutions an outlet to sell mortgage loans they originated, freeing more cash to make more home loans.
It moved from government to public ownership in 1968 and Freddie was started two years later.
Paulson’s goal is to get his plan attached to a sweeping housing-rescue package. The Senate and House have each passed bills and a final package has to be hammered out. The centerpiece of the legislation is to help strapped homeowners avoid foreclosure legislation but it also contains provisions to revamp oversight of Fannie Mae and Freddie Mac.
Shares of Fannie Mae plunged 45 percent last week and are down 74 percent since the beginning of the year. Freddie Mac shares fell 47 percent last week, and have fallen 77 percent so far this year.
A senior Treasury official said any increase in the line of credit — now at $2.25 billion for each company— would be at the Treasury secretary’s discretion. The same would apply to any equity investment made by the government.