A FEDERAL plan to shore up mortgage giants Fannie Mae and Freddie Mac calmed nerves on Wall Street only briefly yesterday before shares resumed their tumble on fears over the broader credit crisis.
Congress could move as early as this week to approve the government plan, announced by treasury secretary Henry Paulson, which expands the two companies' access to credit and allows the US treasury to buy shares in Fannie Mae and Freddie Mac, which own or guarantee almost half of all American home loans.
Freddie Mac's scheduled $3 billion debt sale yesterday found plenty of buyers, and shares in both companies initially rose sharply yesterday morning but fell back in later trading.
Established in the 1930s to buy mortgages from banks in order to free up funds for more home loans, Fannie Mae draws its name from the acronym of its full title, the Federal National Mortgage Association (FNMA). Freddie Mac was created as the Federal Home Loan Mortgage Corporation (FHLMC) to serve a similar function in 1970. Shares in both companies, which are "government-sponsored" but owned by shareholders, fell by almost 50 per cent last week amid fears over their solvency. The US government's moves at the weekend, which include allowing the two mortgage giants to borrow directly from the Federal Reserve at the same rate as commercial banks, were designed to reassure markets that Fannie Mae and Freddie Mac will not be allowed to fail.
Senate banking committee chairman Chris Dodd said yesterday he was confident Fannie Mae and Freddie Mac were sound, and he praised the actions by Treasury and the Federal Reserve.
"It looks . . . that these ideas that are being floated are having the desired effect and that is to calm things down here and to restore some confidence that the people need to have," he told CNN.
Anxiety over the financial sector was fuelled last week by the seizure by regulators of IndyMac Bancorp, once one of the biggest mortgage lenders in the US. The California-based bank was seized last Friday after a bank run in which customers withdrew $1.3 billion of deposits over 11 business days, as worries about the company's survival grew.
A federal agency guarantees bank deposits of up to $100,000 but many customers inadvertently allow their bank balance to rise above that limit. In Pasadena yesterday, hundreds of people lined up outside the bank's headquarters to withdraw their funds.
More than 800 US banks went out of business between 1990 and 1992 and experts predict that dozens could go under in the next few weeks as the number of bad loans rises and access to credit tightens.
Analysts predict some of the biggest financial firms in the US, including Merrill Lynch, Citigroup and JP Morgan Chase, will report dismal quarterly profits this week.
The Federal Reserve yesterday announced a crackdown on dubious lending practices that have hurt many of the riskiest "suprime" borrowers - people with poor credit histories or low incomes. The plan prohibits lenders from making loans without proof of a borrower's income; requires lenders to make sure risky borrowers set aside money to pay for taxes and insurance; restricts lenders from penalising risky borrowers who pay loans off early; and prohibits them from making a loan without considering a borrower's ability to repay a home loan from sources other than the home's value.
"It seems clear that unfair or deceptive acts and practices by lenders resulted in the extension of many loans, particularly high-cost loans, that were inappropriate for or misled the borrower," Federal Reserve chairman Ben Bernanke said.
