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Fannie, Freddie Back From Brink as U.S. Offers Lifeline

Monday, 14 Jul 2008 10:51 AM

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Fannie Mae and Freddie Mac were rebounding sharply Monday from a near-meltdown last week, boosted by a weekend plan offering a lifeline of fresh credit from the US Federal Reserve and Treasury.

In pre-opening trade, Freddie Mac's shares surged 38 percent and Fannie Mae 37 percent following a plunge last week in the face of widening fears about the solvency of the mortgage finance titans.

A bold plan announced Sunday gives the struggling giants that underpin trillions of dollars in home loans access to central bank lending facilities and a temporary increase, pending congressional approval, of their lines of credit from Treasury.

A Fed statement said its Board of Governors had granted the Federal Reserve Bank of New York authority to lend to Fannie Mae and Freddie Mac "should such lending prove necessary."

The loans would be at the primary credit rate offered to investment firms and would be backed by US government and federal agency securities.

Treasury Secretary Henry Paulson meanwhile said he was proposing temporary authority for Treasury to purchase equity in either of the two firms "if needed."

The two firms, chartered by Congress but owned by shareholders own or guarantee almost half of all US home loans, or about five trillion dollars of debt, and have been in crisis amid the worst housing downturn in the United States in decades.

Paulson said Sunday that the "central role" the two play in real estate financing meant they should continue to respond to shareholders and should not be taken over by the federal government.

"We are grateful for the leadership of Secretary Paulson and (Fed) Chairman (Ben) Bernanke," Fannie Mae chief executive and president Daniel Mudd said.

He urged Congress to ensure "swift passage of the new legislative proposals, as well as the important initiatives underway to assist homeowners and help restore stability to the housing market."

"We continue to hold more than adequate capital reserves and maintain access to liquidity from the capital markets," Mudd said.

"Given the market turmoil, having options to access provisional sources of liquidity if needed will help to strengthen overall confidence in the market. "We will continue to do our part to provide liquidity, stability and affordability to the housing market now and in the future."

White House press secretary Dana Perino said Sunday that "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 as shareholder-owned companies."

Richard Syron, chairman and CEO of Freddie Mac, said the company was "heartened" by the plan and called it an "affirmation of the important role of" the two firms.

Freddie Mac was scheduled to sell three billion dollars in short-term notes on Monday, and the market reaction will be crucial for the future of the two companies.

David Kotok, economist at Cumberland Advisors, said the plan is "a partial fulfillment of the implied federal guarantee" of the two government-sponsored enterprises (GSEs).

"It reassures markets and improves the liquidity necessary for the functioning of markets in Fannie and Freddie mortgage related debt ... A rally in their prices and decline in their yields is expected."

Ed Yardeni at Yardeni Research said meanwhile: "The taxpayers have become the losers of last resort of the US financial system. If mortgage losses mount at the two GSEs, then the Treasury will issue more debt and use the proceeds to inject more capital into them. The American public now gets a direct stake in the world's two largest hedge funds."

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