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Pledge fails to lift cloud over Fannie, Freddie

(Agencies)
Updated: 2008-07-15 09:42

Frank also said Fannie and Freddie were financially sound, and would probably not need to borrow from the Fed.

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Late on Monday, Paulson sent a letter to Bernanke and New York Fed President Timothy Geithner specifying that any lending by the Fed to Fannie and Freddie should be a short-term "bridge" until Congress approves a bigger credit line from the Treasury.

The Treasury Department is seeking Congressional approval for a temporary increase in the credit line it provided for Fannie and Freddie. Its size is to be determined by Paulson, who told the Fed not to lend to Fannie and Freddie until they exhaust their Treasury credit lines.

Debt buyers seemed confident in the mortgage agencies. Monday's $3 billion debt sale from Freddie drew stronger demand than a similar one on July 7. Fannie announced that it will sell $3 billion worth of debt on Wednesday.

While Monday's debt auction was routine, it was viewed as a key test of market appetite following last week's stock sell-off. Freddie's treasurer said the sale was "business as usual," and he did not perceive a crisis of investor confidence.

The two companies rely on regular debt auctions for funding, and any disruption in the flow of money could push up mortgage rates and deal a fresh blow to a sinking US housing market and fragile economy.

The housing crisis and subsequent credit contraction have prompted banks to tighten lending terms, leaving Fannie and Freddie as the dominant source of mortgage financing.

Fannie and Freddie own or guarantee $5 trillion of debt, close to half the value of all US mortgages. Foreign central banks, mostly in Asia, hold $979 billion of the bonds and mortgage-backed bonds sold by the agencies.

The White House said Fannie and Freddie had not tapped any of the lifelines offered by the Treasury and Fed on Sunday.

"As far as I know, neither of the companies have gone forward to take advantage of any of the borrowing opportunities," White House spokeswoman Dana Perino told reporters. "Both of their regulators have stated that the companies are well-capitalized."

Freddie Mac shares fell 8.3 percent to end at $7.11 and Fannie Mae shed 5.1 percent to close at $9.73. The shares posted both double-digit gains and losses in a volatile session over the span of only a couple of hours.

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