Confidence is Key in Mortgage Giants Rescue Plan

After more than two weeks of frenzied activity, lawmakers agreed Wednesday to vote on a new housing bill that includes unlimited government credit lines for beleaguered Fannie Mae and Freddie Mac, with the option to buy unspecified stakes in the mortgage giants if their financial situation worsens. The bill, which also includes measures to help homeowners struggling with payments, could reach President Bush for his approval and become law by the end of this week.

Concern over the financial state of the companies jumped on July 7 after analysts said the firms would find it nearly impossible to raise the billions needed to satisfy a change in accounting rules.

Though their importance to the housing market meant pair would likely be exempt to the new rule, the combination of the biggest housing downturn since the Great Depression and concerns over the firm's solvency was enough to send investors into a panic.

At the end of trading on the day of the report, Freddie and Fannie's market value fell to their lowest point in 13 years. In one day their value fell 18 percent and 16 percent respectively.

While shares had hovered in the $60 dollar range in October of 2007, by July 8, they were around $17.

Government to the rescue

The latest government moves comes amid plunging home values and a slew of missed mortgage payments. Commercial banking giants such as Citigroup and other major Wall Street firms have taken heavy write-downs but have managed to survive. Smaller firms such as Indymac Bancorp were seized by the government to protect customers.

In March, one of the largest commercial investors, Bear Stearns, was rescued by U.S. banking officials after being slammed by the housing market . Fed chief Ben Bernanke said that if Bear Stearns had failed, it would have caused damage that would have been "severe and extremely difficult to contain."

Investors had bet heavily on the housing market which, until the first half of 2007, had been riding a bubble of rapidly rising home prices. With everyone buying homes, it seemed there was nothing but good opportunities in buying products linked to home loans.