The Treasury Department and Federal Reserve on Sunday laid out plans to provide a financial lifeline to troubled mortgage giants Fannie Mae fnm and Freddie Mac fre, underscoring alarm about their deteriorating outlook and determination to provide a strong federal backstop.
Treasury Secretary Henry Paulson wants Congress to approve a three-part plan to shore up the huge companies: giving Treasury authority to take an ownership position in the firms if needed; temporarily increasing their existing line of credit at Treasury, currently $2.25 billion; and giving the Fed a role in setting capital requirements and other standards.
Separately, the Fed said it would lend to Fannie and Freddie, if necessary. The central bank has authority to lend to partnerships or corporations that put up U.S. government and federal agency bonds as collateral.
The goal is not to have the government take over the firms, which buy mortgages from lenders and resell them to investors in the form of mortgage-backed securities, but to provide support to let them continue operating as private companies.
Wall Street initially appeared to approve of the plan as stocks jumped in early trading, but the rally faded and turned lower as fears persisted.
"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 in a statement.
The two firms hold or back $5.3 trillion in mortgage debt — roughly half of all U.S. mortgages. Freddie Mac stock has plunged 47% the past 10 days, and Fannie Mae's stock has tumbled 45%.
The move came as Wall Street readies for Freddie Mac's effort Monday to sell $3 billion in short-term notes. A failure to attract bidders would be evidence of the company's weakness and potential gridlock in the financial system. The Treasury has been working on proposals with other regulators for several weeks as the plight of the mortgage giants worsened.
Fannie Mae CEO Daniel Mudd welcomed the initiative, while saying Fannie continues to hold more than adequate capital reserves.
Analysts called the move welcome.
"There's a fire," said Rich Yamarone of Argus Investors. "These actions are … an attempt to keep that fire from spreading to the entire financial market."
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, when losses from subprime mortgages engulfed 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% for any borrowed funds — the same rate offered 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."
Paulson said the Treasury is seeking expedited authority from Congress to expand its current line of credit to the two companies and make an equity investment in the companies — if needed.
Sen. Christopher Dodd, chairman of the Senate Banking Committee, on Monday called the 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 Bank — 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 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."