US moves to bolster lending firms

Henry Paulson outlines the Treasury's plans.

The US government has announced sweeping measures to shore up the nation's two largest mortgage finance companies, Freddie Mac and Fannie Mae.

The plan calls on Congress to expand the companies' access to credit and allow the Treasury to buy shares in the companies if needed.

The two firms own or guarantee almost half of all US home loans - more than $5 trillion (£2.5 trillion) of debt.

Their share prices sank last week on fears they may struggle to raise funds.

The BBC's Greg Wood in New York says the emergency measures are meant to allay fears that the two companies are about to run out of money.

Investors welcomed the news, sending Freddie Mac's shares up 17.6% and Fannie Mae's up 24.9% at the start of Wall Street trade.

However by the close of trading both had slid into negative territory, with Fannie Mae falling 5.1% to $9.73, and those of Freddie Mac slid 8.3% to $7.11.

Key role

Announcing that new credit lines would be sought from Congress, Treasury Secretary Henry Paulson said: "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."

FREDDIE MAC & FANNIE MAE The two firms: Buy mortgages from approved lenders and then sell them on to investors - rather than lending directly to borrowers Guarantee or own about half of the $12 trillion US mortgage market Are relied on by almost all US mortgage lenders Are looked to for funds to meet consumer demand for home mortgages Link mortgage lenders with investors - keeping the supply of money widely available and at a lower cost Have no direct UK equivalent Q&A: Freddie Mac/Fannie Mae Importance of Freddie and Fannie

He added that their "support for the housing market" was "particularly important as we work through the current housing correction".

The Federal Reserve also said it would lend to Fannie Mae and Freddie Mac if they needed additional funds.

The two firms play an important role in the financial markets in providing funding for home loans by buying up mortgages and packaging them as investments.

As mortgage backers, the companies have had to pay out when homeowners have defaulted on their loans.

Last week, investor concern that the government might have to bail out Fannie Mae and Freddie Mac because of the huge losses they have suffered in the US property crash sent their shares plummeting

Without Freddie Mac and Fannie Mae, US mortgages would be much dearer

If either firm were to fail, the consequences for the already fragile US financial system would be disastrous as mortgage lending could virtually dry up, our correspondent says.

Restore stability

Both firms have defended their finances, saying they had enough capital to weather the housing slump.

Freddie Mac is due to sell $3bn in short-term debt on Monday, which is seen as a critical test of confidence in the mortgage companies.

As many private sector banks consider reducing their mortgage business, the US government has increasingly looked to Fannie Mae and Freddie Mac to help restore stability to the market.

Steps to shore them up is a positive but the fact that they are having difficulties in the first place is just symptomatic of a difficult environment out there Greg Goodsell Analyst, ABN Amro

"Fannie Mae and Freddie Mac play an important role in our housing finance system, and they should continue to play this role in their current forms," White House spokeswoman Dana Perino said in a statement on Sunday.

Both are privately-owned companies mandated by the US Congress to provide funding to the housing market.

Our correspondent says confidence in many of America's financial institutions is wearing dangerously thin.

Queues of nervous customers are expected later on Monday at IndyMac, a Californian mortgage lender that was taken over by the federal authorities on Friday night, in the second-biggest banking collapse in US history.

After heavy falls in world stock markets on Friday, Asian shares were mixed on Monday as investors absorbed the US government's plans.

"Steps to shore them up is a positive but the fact that they are having difficulties in the first place is just symptomatic of a difficult environment out there," said Greg Goodsell, equity strategist with ABN AMRO in Sydney.

"And that makes it hard to get too positive."