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Feds To 'Backstop' Fannie Mae and Freddie Mac

Government to expand credit line to the big lenders

July 14, 2008

Among the steps unveiled by Treasury Secretary Henry Paulson over the weekend are expanding the government's line of credit to the two entities and allowing the government to purchase shares of the companies, if need be.

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

In recent weeks both Fannie Mae and Freddie Mac – known in the industry as GSEs – have had trouble raising money, since few investors seemed willing to buy their debt. Without cash from investors, the two companies have less money to lend, resulting in fewer mortgages.

The timing of the announcement was made for maximum impact, as both Fannie Mae and Freddie Mac are auctioning a combined $3 billion in securities on Monday. Paulson said he has consulted with both regulators and key members of Congress in coming up with the three-part plan.

"First, as a liquidity backstop, the plan includes a temporary increase in the line of credit the GSEs have with Treasury. Treasury would determine the terms and conditions for accessing the line of credit and the amount to be drawn," Paulson said. "Second, to ensure the GSEs have access to sufficient capital to continue to serve their mission, the plan includes temporary authority for Treasury to purchase equity in either of the two GSEs if needed."

Paulson said use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer.

"Third, to protect the financial system from systemic risk going forward, the plan strengthens the GSE regulatory reform legislation currently moving through Congress by giving the Federal Reserve a consultative role in the new GSE regulator's process for setting capital requirements and other prudential standards," Paulson said.

The crisis on confidence is being driven partly by the seizure of mortgage lender IndyMac, taken over by agents of the Federal Deposit Insurance Corporation Friday, becoming the second largest bank failure in U.S. history. The bank reopens today as IndyMac Federal FSB, operating under FDIC conservatorship.

Under federal law, individual deposits are insured up to $100,000 $100,000 per depositor plus $250,000 per retirement account.

At the time of its seizure, IndyMac had total assets of $32.01 billion and total deposits of $19.06 billion as of March 31, 2008.

As conservator, the FDIC said it will operate IndyMac Federal Bank, FSB to maximize the value of the institution for a future sale and to maintain banking services in the communities formerly served by IndyMac Bank, F.S.B.

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