Officials considering ways to help mortgage giants

July 13, 2008 7:05:22 PM PDT
Government officials are in discussions about developing a plan for propping up the big mortgage companies Fannie Mae and Freddie Mac should they falter.

The Federal Reserve, the Treasury Department and other regulators are keeping in close consultation this weekend. Investors are worried about the companies' finances and becoming convinced that the government will have to step with some kind of rescue. That sent the companies' stock plummeting.

Fannie Mae and Freddie Mac either hold or back $5.3 trillion of mortgage debt. That's about half the outstanding mortgages in the United States.

If one or both of the companies were to fail, it would wreak havoc on the already fragile financial system and the crippled housing market. The problems would spill over in the national economy, too.

Treasury Secretary Henry Paulson on Friday said the government's focus was to support the pair "in their current form" without a takeover.

Short of a government takeover of the firms, one option is having the Fed or Treasury buy Freddie Mac or Fannie Mae securities, if investors were to shun them. Another option is to let the companies draw emergency loans ? if they need them ? from the Fed.

Hoping to bolster confidence, Senate Banking Committee Chairman Chris Dodd, D-Conn., told CNN on Sunday that Fannie and Freddie are financially sound.

"What's important here are facts," Dodd said. "And the facts are that Fannie and Freddie are in sound situation. They have more than adequate capital ? in fact, more than the law requires. They have access to capital markets. They're in good shape. The chairman of the Federal Reserve has said as much. The secretary of the Treasury as said as much."

Last week Fed Chairman Ben Bernanke and Paulson, appearing before the House Financial Services Committee, made a point of saying that the regulator of Fannie and Freddie, the Office of Federal Housing Enterprise Oversight, has found both companies adequately capitalized.