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.

Yet lax lending standards and an eagerness to make sales eventually led to a collapse in prices which economists now say may not recover for several years.

Confidence Building

In days after the stocks fell, the White House and President Bush's top economic advisor Henry Paulson issued statements in support for the companies and urged Congress to take action.

A week after the crisis began, Paulson formally proposed a plan for the companies, saying that the firms' role in supporting the housing market's "continued strength is important to maintaining confidence and stability in our financial system and our financial markets."

While Paulson -- the former chief executive of one of Wall Street's most successful investment banks -- wanted to keep the companies in private hands, his plan would boost credit lines to firms and give the Treasury the ability to buy stakes in the companies if needed. He also proposed a stronger regulator for the firms.

Company executives praised the government action.

Fannie chief executive Daniel H. Mudd expressed appreciation and gratefulness for the support. Freddie CEO Richard F. Byron said the firm was heartened. Both firms said they had enough capital and did not need the additional government help but said the new options would help stabilize markets.

On his weekly national radio address and in a press conference to report on steps being taken by his administration to boost the slowing economy, Bush urged lawmakers to approve Paulson's plan.

"It's been a difficult time for American families," Bush said at one press conference. "We must ensure we can continue providing credit during this time of stress."

At a hearing before Senators in Washington, Paulson pushed to convince some lawmakers who opposed giving the Treasury an unlimited amount of money to support the companies.

Paulson reasoned that by giving such authority, the market would believe that the government's support was solid, increasing confidence.