Paulson: Keep Fannie, Freddie in current form

Government leaders look at options to prop up the nation’s key mortgage companies.

WASHINGTON (AP) — Treasury Secretary Henry Paulson, seeking to calm nervous investors about the financial state of Fannie Mae and Freddie Mac, said Friday the government’s primary policy focus currently is to leave the congressionally created mortgage giants intact.

“Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission,” Paulson said.

The financial health of the two companies is of critical concern to Washington policymakers because of the crucial role they play in the housing market.

Sen. Christopher J. Dodd, D-Conn., the Banking Committee chairman, said he spoke Friday to Federal Reserve Chairman Ben Bernanke and Paulson, saying the two are “looking at various options” for propping up the firms if they ultimately need help. These include giving them access to the Fed’s emergency lending program, Dodd said.

Paulson’s comments came amid reports that the government was considering a plan to take over one or both of the companies and place them in a conservatorship.

In an unprecedented and controversial move in March, the Fed allowed big Wall Street firms to — on a temporary basis — directly borrow cash from the emergency facility. That privilege has been afforded to commercial banks on a permanent basis for years.

Fannie Mae and Freddie Mac hold or guarantee around $5 trillion worth of mortgages. That’s roughly half of the $9.5 trillion debt of the United States. The fear is that a failure of one or both would wreak havoc on the nation’s financial system and the broader economy as well.

President Bush met with his senior economic advisers Friday morning at the Energy Department. Earlier, Paulson came to the White House and briefed Bush in the Oval Office. Bush called the mortgage giants “very important institutions” and said that Bernanke and Paulson “will be working this issue very hard.”

Paulson and Bernanke “are certainly examining what other means might be taken in order to shore up the situation should it become necessary,” said Dodd, who called a Capitol Hill news conference to dispel fears about the firms’ financial health. He called them “fundamentally sound and strong.”

“There is sort of a panic going on today, and that’s not what ought to be — the facts don’t warrant that reaction,” Dodd said. He said Fannie and Freddie have adequate capital and plenty of access to it.

“These are reliable, sound institutions, and they’re absolutely critical to the housing market,” Dodd said.

Paulson, earlier in the day, said his department was “maintaining a dialogue with regulators and with the companies.” The companies’ main regulator, the Office of Federal Housing Enterprise Oversight, will continue to work with Fannie Mae and Freddie Mac, he said, “as they take the steps necessary to allow them to continue to perform their important public mission.”

Shares of the companies’ stocks have plunged in recent days, with Freddie’s and Fannie’s down sharply on Friday as fear intensified. Investors are increasingly worried the companies will suffer more losses as housing prices keep falling and foreclosures keep rising.

And stock investors are worried the companies will have to raise a lot more money to cover those losses. By law the companies are required to hold only a fraction of what is mandated for commercial banks as a financial cushion against risk.