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Washington, Wall St. weigh Fannie, Freddie help

(Agencies)
Updated: 2008-07-12 19:02

Washington - Wall Street and Washington wrestled Friday with how to shore up mortgage giants Fannie Mae and Freddie Mac, two troubled pillars of the economy whose failure would deal a devastating blow to the already crippled housing market.

A trader talks on the a phone while working on the floor of the New York Stock Exchange on Friday, July 11, 2008 in New York. Wall Street's angst over the ongoing fallout from the credit crisis made for a turbulent end to a volatile week Friday -- stocks tumbled, soared and then turned south again as investors tried to assess the dangers faced by the country's biggest mortgage financiers, Fannie Mae and Freddie Mac. [Agencies]

As investors grew more convinced that only some type of government bailout could rescue the firms, US Treasury Secretary Henry Paulson said the focus was to support the pair "in their current form" without a takeover.

The US government was considering giving Fannie and Freddie access to the Fed's emergency lending program as one option to prop up the firms, said Sen. Christopher Dodd, D-Conn., citing conversations with Fed Chairman Ben Bernanke and Paulson.

A Fed spokeswoman said the US central bank had not talked with Fannie and Freddie about the emergency lending program. The spokeswoman declined to discuss any other options being considered.

Both companies issued statements late Friday calling their financial positions solid. Freddie Mac said it did not see an immediate need to raise fresh money, and said other options included cutting its annual shareholder dividend, which costs US$650 million a year.

Investors drove Fannie and Freddie shares to 17-year lows before the stocks recovered somewhat. The turmoil, combined with a new high for oil prices, helped send the Dow Jones industrials briefly below 11,000 for the first time in nearly two years. The Dow finished down about 1 percent at 11,100.54.

Fannie and Freddie were created by the US government to provide more Americans the chance to own a home by adding to the available cash banks can loan customers. Shares of both companies are publicly owned.

Their importance to the housing market and overall US economy is hard to overstate: Fannie and Freddie either hold or back US$5.3 trillion of mortgage debt, or about half the outstanding mortgages in the United States.

"Without them, our economy would collapse," Piper Jaffray analyst Robert P. Napoli said in a note to clients.

In the mortgage industry, the prospect of doing business without Fannie and Freddie is truly frightening.

"The cost of borrowing would go up dramatically," said Steve Habetz, president of Threshold Mortgage Co. in Westport, Conn. "We would be going back to dark ages where a homebuyer would be hoping that a local bank would (have enough resources to) make the loan that it will keep on its books."

Published reports suggested the government was considering taking over one or both of the companies and running them itself.

US President Bush met with senior economic advisers and said Paulson had assured him that Paulson and Federal Reserve Chairman Ben Bernanke "will be working this issue very hard."

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