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US 'mulls bail-out for lenders' US moves to support lending firms
(about 7 hours later)
The US government is reported to be considering injecting up to $15bn (£7.5bn) into the providers of mortgage funding Freddie Mac and Fannie Mae. The US government has announced sweeping measures to shore up the nation's two largest mortgage finance companies, Freddie Mac and Fannie Mae.
The extra capital could be announced before the US markets open on Monday, according to the London-based Sunday Times and Sunday Telegraph newspapers. The plan calls on Congress to expand the companies' current line of credit and allow the Treasury to buy equity capital in the companies if needed.
Freddie Mac and Fannie Mae guarantee almost half of all US home loans.Freddie Mac and Fannie Mae guarantee almost half of all US home loans.
Their share prices fell nearly 50% last week amid fears that they might have trouble raising money. Their share prices fell nearly 50% last week amid fears that they might have trouble raising funds.
Freddie Mac and Fannie Mae are known as government-sponsored enterprises (GSE) and they buy debt from the companies that sell mortgages to house-buyers. The BBC's Greg Wood in New York says the emergency measures are meant to allay fears that the two companies are about to run out of money.
They then sell on the debt to investors and because they are government sponsored, the price of mortgages is kept low. Key role
If investors decided to stop buying the debt from the two companies it would mean they would have to stop supporting the housing market and the already tough situation would get even worse. Announcing that new credit lines would be sought from Congress, 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."
Nationalisation rumours He added that their "support for the housing market is particularly important as we work through the current housing correction".
On Friday US Treasury Secretary Henry Paulson was forced to issue a statement saying that he would support the two GSEs "in their current form" to dispel rumours of nationalisation. The Federal Reserve also said it would lend to Fannie Mae and Freddie Mac if they need additional funds.
Under the plan reportedly being considered, the US government would receive special shares in Fannie Mae and Freddie Mac, which would further reduce the already depressed value of the existing shareholders' stakes. The two firms play an important role in the financial markets in providing funding for home loans by buying up mortgages and packaging them as investments.
Mr Paulson is insisting that if there is to be a rescue then it must not benefit shareholders, the Wall Street Journal reported on Saturday. As mortgage backers, the companies have had to pay out when homeowners have defaulted on their loans.
Freddie Mac is due to sell $3bn in short-term debt on Monday, which may hasten the government's decision. Both firms defended their finances, saying they had enough capital to weather the housing slump.
It is important for the sale to be a success to show confidence in the GSEs.
Treasury Department officials have been on the phone over the weekend making sure that banks that would normally buy such such debt from Freddie Mac are planning to bid this time, according to the Washington Post.
The newspaper reports that the officials are now optimistic about the sale.
Obama comments
The Democratic White House hopeful Barack Obama has made his first comments about the problems facing the GSEs.
He described the situation as being of "extraordinary concern", but did not support an immediate bail-out.
"I think we need to watch carefully and see how it plays out before we make a decision about which steps need to be taken, if any," he told reporters on a flight to San Diego.
"I have confidence that with some prudent steps by the government, that we'll be able to stabilise the situation."