Fannie Mae and Freddie Mac did not escape government support

US President George W. Bush announced the approval of a package of measures to support the troubled mortgage giants Fannie Mae and Freddie Mac, proposed by US Treasury Secretary Henry Paulson. Fannie Mae and Freddie Mac will be given the opportunity to receive credit support from the government, and if necessary, we can even talk about buying out their shares. The United States can take this step only in the event of a further and deep fall in prices on the housing market.

Yesterday morning, US President George W. Bush, at a meeting with his economic team, confirmed that he approves of US Treasury Secretary Henry Paulson's plan put forward the day before to support the struggling Fannie Mae and Freddie Mac. The efforts of the US authorities to prevent the collapse of mortgage companies helped to temporarily normalize the situation yesterday. Freddie Mac sold $3 billion in three- and six-month bonds at its weekly auction. At the same time, demand for them was 50% higher than the three-month average, Bloomberg Stone & McCarthy Research Associates quotes.

The day before, Mr. Paulson read out a short address agreed upon with the White House. Emphasizing the important role of these institutions in the financial system of the United States and around the world, he listed three measures that would materialize the special status of these government-sponsored enterprises (GSEs). Firstly, they will increase the US Treasury line of credit (now each of these companies can receive up to $2.25 billion). A Treasury representative anonymously clarified that the expansion of the credit window will last for a year and a half. Second, the Treasury will be given the "temporary right" to buy shares in both companies "if required." A number of experts interviewed by Reuters and Bloomberg concluded that renationalization of companies is inevitable. Third, the “systemic risk protection” legislation will be amended to give the US Federal Reserve (Fed) additional oversight authority over the GSEs. Also on Sunday, the Federal Reserve announced that the Federal Bank of New York has been granted the right to lend to Fannie Mae and Freddie Mac.

The American authorities were forced to take extraordinary measures when at the end of last week the stock prices of both companies collapsed after Fannie Mae placed two-year bonds on July 9 with a yield of 3.27% per annum - 0.74% higher than similar Treasury bonds. The difference in yields was a record for securities of this type of Fannie Mae and raised doubts among investors that the company has sufficient capital.

The companies' problems are due to the situation in the US housing market: the fall in real estate prices there has been going on for almost two years. As of April 2008 (data published on June 24), the value of the S&P/Case-Shiller index for the 20 largest cities (reflects the level of housing prices, the level of 100 corresponds to January 2000) was 169.85, the maximum of 206.52 was reached in July 2006. Fannie Mae and Freddie Mac hold or guarantee almost half of all mortgage debt in the US (about $5 trillion of the $12 trillion, comparable to the public portion of the US government debt), and most of the financing comes from borrowing.

Falling housing prices worsen the quality of mortgage companies' portfolios, reduce the value of their assets, investors demand higher returns from their obligations, and it becomes increasingly difficult for them to refinance their obligations. And for the American authorities there is a growing risk that they will have to guarantee the entire debt of the GSE - that is, doubling the volume of the national debt.

Maxim Kommersant-Shishkin, Evgeniy Kommersant-Khvostik

The White House is under mortgage