U.S. Government Plans to Aid Fannie Mae & Freddie Mac

The Federal Reserve and Treasury announced plans on Sunday to lend a hand to mortgage giants, Fannie Mae and Freddie Mac, by temporarily extending their long-standing credit lines if needed. The two companies would be able to borrow funds from the Fed at a rate of 2.25%, the same rate given to commercial banks and big Wall Street Firms.

The Fed said that this should helps the companies' ability "to promote the availability of home mortgage credit during a period of stress in financial markets." The Treasury would also be allowed to invest in Freddie or Fannie stock. Treasury Secretary Henry Paulson also said the Treasury should be given a greater role in the supervision of the two companies.

These moves still require congressional approval.

Fannie and Freddie play a vital role in the U.S. economy, by backing or holding $5.3 trillion worth of mortgage debt. That's roughly equal to half of all the mortgages in the country. If these companies were not able to continue to provide their mortgage services, less cash would be available for mortgages, less people could get financing, and the loans that were available would cost more. Both companies are counted on to aid in the recovery of the battered U.S. housing market.
Congress created Fannie in 1938 to help more people become homeowners, by giving mortgage lenders an outlet for the loans they originated. When Fannie could buy some of those loans, it freed up additional capital so that lenders could make more loans, and more people could live the American dream. Fannie moved from government to public ownership in 1968, and Freddie was formed two years later.

Fannie and Freddie are government-sponsored enterprises (GSEs), meaning they are privately owned, but receive government support. They also assume some public responsibilities, like agreeing to back or buy so many dollars worth of mortgages a year. The GSEs back or buy conforming loan mortgages, which means not a jumbo or FHA/VA loan, from mortgage lenders who originated the loan. The GSEs then repackage those mortgages as bonds, and sell them to investors with a guarantee of repayment.

But since these quasi-government programs are also publicly traded, it means they must also turn a profit to satisfy investors. Shares of these two companies have plunged in recent weeks as losses from their mortgage holdings have surged, threatening their financial survival. The moves by the Fed are hoped to calm nervous investors and bring some stability back to Wall Street.



Sources:
CCN.com
mtgprofessor.com
baltimoresun.com