Credit crunch forces the U.S. government to bail out mortgage lenders with $5.3 TRILLION of loans

13 April 2012

The U.S. government has dramatically bailed out the country's two biggest mortgage giants in a desperate bid to bolster the housing market and the wider economy.

The Treasury and Federal Reserve announced measures to shore up the Federal National Mortgage Association, named Fannie Mae, and the Federal Home Mortgage Corporation, known as Freddie Mac late last night.

Treasury Secretary Henry Paulson said the government was planning to expand its current line of credit to the lenders should they need it, after their shares slumped last Friday amid concerns they were about to go bust.

The government would also buy equity capital in the firms to bolster them as house prices continue to drop, Mr Paulson said.

In a separate statement, the Federal Reserve pledged to lend to Fannie Mae and Freddie Mac if they need additional funds.

Bailed out: U.S. mortgage lenders Fannie Mae, above, and Freddie Mac have been shored up by the government

Fannie Mae and Freddie Mac either hold or back $5.3 trillion of mortgage debt, which is about half the outstanding mortgages in the United States meaning they effectively underpin America's entire housing market.

It is hoped the plans will calm rising panic on Wall Street about the companies' futures but there are fears the move could have an impact on the UK and across Europe.

With less cash to lend elsewhere at a time when it is desperately needed, mortgage costs could rise still further with even tighter lending criteria than before.

Neither the U.S. Treasury of the Fed revealed the value of shares that could be bought if the measures are approved but it is thought to be around $15 million.

The plans are unprecedented in the U.S. and still require congressional approval.

They aim to secure the future liquidity of the lenders, which have been the focus of increasing speculation as the collapse of the sub-prime market in the U.S. continues.

As mortgage backers who provide funding for home loans, they are forced to pay out when homeowners default on their loans.

Both insist they have enough finances to see them through the housing downturn but their share prices have fallen more than 50 per cent in recent weeks due to concerns they were about to be nationalised.

Announcing the plans yesterday, Mr Paulson was forced to deny the rumours and insist the measures were based on supporting the lenders in their 'current form'.

'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-owner companies,' he said.

'Their support for the housing market is particularly important as we work through the current housing correction.'

<!-- var sessionidstring = ';jsessionid=JWBENYVATQYZPQFIQMGCFFWAVCBQUIV0'; // -->

Giants: Together, the two companies account for around half of all mortgages in the U.S.

The plans also seek a 'consultative role' for the Federal Reserve 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 department, the Fed and other regulators were in close consultation throughout the weekend after investor fears about the companies' finances sent the companies' stock plummeting in trading last week.

The market opening this morning will be a crucial test of confidence following the measures. Freddie Mac is due to auction a combined $3billion in short-term debt.

London's FTSE 100 Index surged almost two per cent today following the news, also buoyed by the takeover of high street lender Alliance & Leicester

However, Asian markets fell with the Hang Seng index closing down 170.1 at 22014.5 and the Straits Times index in Singapore closing down 22.7 at 2904.1.

Helping hand: Secretary of the Treasury Henry Paulson announcing the measures in Washington

Mr Paulson is working closely with congressional leaders to present his plan as soon as possible as one complete package.

The announcement marked the latest move by the government to bolster confidence in the mortgage companies.

with the US housing market collapsing and repossessions rising, fears that they are facing huge losses meant that shares in Fannie Mae and Freddie Mac dropped in value by almost half at one point last Friday.

The two companies have become increasingly important to the ailing US housing market, as more and more banks which previously financed mortgages have stopped lending after racking up huge losses on sub-prime mortgage loans.

With London markets opening before Wall Street today, investors here will want some sign today from the US administration that it has averted another crisis in its mortgage market.

UK banks’ share prices have collapsed in value during the past year and many have gone cap in hand to shareholders to ask for money to prop up their businesses, with Bradford & Bingley due to ask investors to back a £400million fundraising rights issue this week.

Create a FREE account to continue reading

eros

Registration is a free and easy way to support our journalism.

Join our community where you can: comment on stories; sign up to newsletters; enter competitions and access content on our app.

Your email address

Must be at least 6 characters, include an upper and lower case character and a number

You must be at least 18 years old to create an account

* Required fields

Already have an account? SIGN IN

By clicking Create Account you confirm that your data has been entered correctly and you have read and agree to our Terms of use , Cookie policy and Privacy policy .

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

Thank you for registering

Please refresh the page or navigate to another page on the site to be automatically logged in