U.S. Government Steps Up To Rescue Faltering Mortgage Giants

The United States Treasury and Federal Reserve revealed bold steps to support the two mortgage finance giants. In a move reminiscent of the Bears Stearns scenario of March 2007, the Federal Reserve will allow Fannie Mae and Freddie Mac to access its discount window for emergency funds. In turn, the Treasury confirmed that it would increase its line of credit to the two GSEs and would even consider purchasing equity in them if this became necessary.

The Federal National Mortgage Association (FNMA), which officially took on the commonly used name of “Fannie Mae”, was founded in 1938 as a government agency under F.D. Rooseveldt’s “New Deal” programs. The main objective at the time was to provide liquidity to the mortgage market, thereby offering relief to the poor and facilitating the recovery of the ailing post-Great Depression economy. Fannie Mae dominated the U.S. secondary mortgage market for the following thirty years, and continued to do so after being converted into a private corporation in 1968.

Fannie Mae, along with the Federal Home Loan Mortgage Corporation (commonly known as Freddie Mac), owns or guarantees approximately half of the United State’s estimated $12 trillion mortgage market. Although Fannie Mae is not unequivocally funded or backed by the U.S. government and there is no statutory government guarantee covering the securities it issues, it is a commonly held belief in the investment community that, in the unlikely event of Fannie Mae running into trouble, the government would step in to prevent a catastrophe. Until now, this assumption has never been put to the test. But faced with the possibility of billion dollar losses brought about by the drastic downturn in the U.S. housing market, the government, led by President George Bush and Treasury Secretary Hank Paulson, is stepping up to the plate in an effort to rescue Fannie Mae and Freddie Mac. It is anticipated that this will boost confidence, not only in the two beleaguered GSEs, but also in the stability of the U.S. financial system.