Rocky Mountain News - By Associated Press
Scrambling to bolster eroding investor confidence, the Federal Reserve and the Treasury Department announced unprecedented steps to brace slumping mortgage giants Fannie Mae and Freddie Mac.
The plan, unveiled Sunday, is intended to signal that the government is prepared to take all necessary steps to prevent the credit market troubles that erupted last year with losses from subprime mortgages from engulfing financial markets.
The Fed said it granted the Federal Reserve Bank of New York authority to lend to the two companies "should such lending prove necessary." They would pay 2.25 percent for any borrowed funds - the same rate given to commercial banks and big Wall Street firms.
The Fed said this should help the companies' ability to "promote the availability of home mortgage credit during a period of stress in financial markets."
Secretary Henry Paulson said the Treasury is seeking expedited authority from Congress to expand its current line of credit to the two companies and buy shares of the companies - if needed.
Rep. Barney Frank, D-Mass., the Financial Services Committee chairman, said the House would move by the end of the week to fold "the essence" of Treasury's proposal into a sweeping housing package, with the goal of clearing it for President Bush by the end of next week.
That package includes a foreclosure rescue to help strapped homeowners get new, more affordable government-backed mortgages through the Federal Housing Administration, and creates a new regulator and tighter controls for Fannie Mae and Freddie Mac.
Here are questions and answers about Fannie Mae and Freddie Mac and their role in the mortgage market:
What are Fannie Mae and Freddie Mac?
They are government-sponsored enterprises and the nation's largest buyers and insurers of mortgages. They pool some of the mortgages they buy from banks and sell them to investors, which effectively makes them middlemen between banks and investors.
Fannie and Freddie hold or back more than $5 trillion in mortgages, about half the outstanding mortgage debt in the United States. They are publicly owned and their stock is traded on the open market.
They were created to give low- and middle-income Americans the chance to buy homes at a reasonable interest rate. The money they provide to banks to lend to people also is supposed to help stabilize the mortgage market in times of stress by ensuring sufficient resources for loans.
What problems do they face?
Over the past year, mortgages have defaulted at a faster rate, and companies have had to take billions of dollars in losses.
Fannie and Freddie are required by their government regulator to have a financial cushion - cash or securities to fall back on. With losses rising, that cushion has been dwindling. That has forced them to raise new money when it has been expensive and difficult to do so.
Fannie and Freddie lost a combined $5.1 billion last year and $2.35 billion in the first quarter of 2008.
Most of the mortgages Fannie and Freddie insure or own are traditional, prime mortgages that are among the safest in the market. The pair backed very few of the exotic subprime mortgages that have caused the most problems over the past year. But they did invest in subprime mortgage securities. And even prime borrowers have been defaulting as the crisis in the mortgage market spreads.
What would happen if they fail? How would it affect people seeking mortgages?
Government officials say the agencies are too important to let them fail. In a government bailout, the Office of Federal Housing Enterprise Oversight would take control of the companies and oversee their operations. But that would leave taxpayers on the hook. The shake-up in the mortgage market also could make mortgages more expensive.
Originally published by Associated Press.
(c) 2008 Rocky Mountain News. Provided by ProQuest Information and Learning. All rights Reserved.
A service of YellowBrix, Inc.
Scrambling to bolster eroding investor confidence, the Federal Reserve and the Treasury Department announced unprecedented steps to brace slumping mortgage giants Fannie Mae and Freddie Mac.
The plan, unveiled Sunday, is intended to signal that the government is prepared to take all necessary steps to prevent the credit market troubles that erupted last year with losses from subprime mortgages from engulfing financial markets.
The Fed said it granted the Federal Reserve Bank of New York authority to lend to the two companies "should such lending prove necessary." They would pay 2.25 percent for any borrowed funds - the same rate given to commercial banks and big Wall Street firms.
The Fed said this should help the companies' ability to "promote the availability of home mortgage credit during a period of stress in financial markets."
Secretary Henry Paulson said the Treasury is seeking expedited authority from Congress to expand its current line of credit to the two companies and buy shares of the companies - if needed.
Rep. Barney Frank, D-Mass., the Financial Services Committee chairman, said the House would move by the end of the week to fold "the essence" of Treasury's proposal into a sweeping housing package, with the goal of clearing it for President Bush by the end of next week.
That package includes a foreclosure rescue to help strapped homeowners get new, more affordable government-backed mortgages through the Federal Housing Administration, and creates a new regulator and tighter controls for Fannie Mae and Freddie Mac.
Here are questions and answers about Fannie Mae and Freddie Mac and their role in the mortgage market:
What are Fannie Mae and Freddie Mac?
They are government-sponsored enterprises and the nation's largest buyers and insurers of mortgages. They pool some of the mortgages they buy from banks and sell them to investors, which effectively makes them middlemen between banks and investors.
Fannie and Freddie hold or back more than $5 trillion in mortgages, about half the outstanding mortgage debt in the United States. They are publicly owned and their stock is traded on the open market.
They were created to give low- and middle-income Americans the chance to buy homes at a reasonable interest rate. The money they provide to banks to lend to people also is supposed to help stabilize the mortgage market in times of stress by ensuring sufficient resources for loans.
What problems do they face?
Over the past year, mortgages have defaulted at a faster rate, and companies have had to take billions of dollars in losses.
Fannie and Freddie are required by their government regulator to have a financial cushion - cash or securities to fall back on. With losses rising, that cushion has been dwindling. That has forced them to raise new money when it has been expensive and difficult to do so.
Fannie and Freddie lost a combined $5.1 billion last year and $2.35 billion in the first quarter of 2008.
Most of the mortgages Fannie and Freddie insure or own are traditional, prime mortgages that are among the safest in the market. The pair backed very few of the exotic subprime mortgages that have caused the most problems over the past year. But they did invest in subprime mortgage securities. And even prime borrowers have been defaulting as the crisis in the mortgage market spreads.
What would happen if they fail? How would it affect people seeking mortgages?
Government officials say the agencies are too important to let them fail. In a government bailout, the Office of Federal Housing Enterprise Oversight would take control of the companies and oversee their operations. But that would leave taxpayers on the hook. The shake-up in the mortgage market also could make mortgages more expensive.
Originally published by Associated Press.
(c) 2008 Rocky Mountain News. Provided by ProQuest Information and Learning. All rights Reserved.
A service of YellowBrix, Inc.
