US to bail out mortgage market

The US government is moving to guarantee troubled mortgage finance organisations Fannie Mac and Freddie May.

Between them the two loan guarantee businesses – which do not lend directly to customers - cover some $5 trillion (£2.5 trillion) of assets, or half of the US mortgage market.

However, speculation has been rife in recent days the organisations – which were formed during under Franklin D Roosevelt's New Deal – may be experiencing liquidity concerns following the impact of the credit crunch.

Now the government has moved to quell this potential unrest, calling on Congress to open new lines of credit to Fannie Mac and Freddie May, and buy shares in the company's as and when necessary.

Announcing the plans Treasury Secretary, Henry Paulson, said: "Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owner companies."

Mr Paulson also added it was: "Important to maintaining confidence and stability in our financial system and our financial markets.

"Therefore, we must take steps to address the current situation as we move to a stronger regulatory structure."

The Federal Reserve also said it would lend to Fannie Mae and Freddie Mac if they needed additional funds

Shares in both companies plummeted by more than 40 per cent last week, as speculation mounted over their performance.

Foreign central banks, mostly from Asia, hold $979 billion (£480 billion) of the bonds and mortgage-backed assets sold by the agencies.

Fannie Mac and Freddie May play a central role in the US mortgage market, providing wholesale funds for retail lenders to offer as mortgages.

Loans are then repackaged and sold as investments.

However, as in increasing number of homeowners have been defaulting on mortgages, the lenders have been forced to cover the cost.

"Fannie Mae and Freddie Mac play an important role in our housing finance system, and they should continue to play this role in their current forms," White House spokeswoman Dana Perino said in a statement yesterday.

Chris O'Toole