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2U.S. Doubles Fannie, Freddie Backing to $400 Billion

By Binyamin Appelbaum

Washington Post Staff Writer
Thursday, February 19, 2009; Page A06

The federal government yesterday doubled its commitment to Fannie Mae and Freddie Mac, promising to reimburse the companies for up to $400 billion in losses on their investments in mortgage loans.

The massive expansion of the government backstop is a response to mounting strains on the two companies, officials said.

It was announced as part of the Obama administration's broad plan to reduce foreclosures, which will further squeeze the companies' revenue by requiring the pair to refinance or modify millions of loans to lower monthly payments.

And it comes as a souring economy is pushing more borrowers to default. Fannie and Freddie estimate they will need up to $65 billion from the original $200 billion backstop to cover their losses on mortgage-related investments in the second half of 2008.

"It is crucial to maintain confidence in these institutions even under worse-than-expected economic conditions," Treasury Secretary Timothy F. Geithner said yesterday in a statement announcing the new aid package.

The companies, both based in the Washington area, were seized by the government in September to stabilize their role as the main funding source for mortgage lending. Fannie and Freddie buy loans from originators such as banks, allowing new loans to be made before existing ones are repaid.

At the time, the government promised to cover the companies' losses, injecting money in any quarter when the companies' liabilities exceed their assets, up to $100 billion each. Fannie and Freddie raise money from private investors to fund their loan purchases, and the government wanted to reassure those investors that the companies would be able to repay their debts.

Officials said in September that $200 billion was much more money than the companies would need. Officials now acknowledge that won't be enough to calm investors. Yesterday, they said that $400 billion would be much more money than the companies would need.

"Resetting these agreements from $100 to $200 billion each should remove any possible concerns debt and mortgage-backed securities investors have about the strong commitment of the U.S. government to support Fannie Mae and Freddie Mac," said James B. Lockhart III, director of the Federal Housing Finance Agency, which oversees the companies.

The Obama plan also increases by $100 billion, to $1.8 trillion, the volume of mortgage loans the two companies can own. The change has the effect of allowing the companies to sell more debt to raise money to buy additional loans. The administration also said that the Treasury would continue to buy securities created by the two companies, easing the pressure to find private investors. Both moves will tend to reduce the cost of financing mortgages, holding down interest rates for customers.

The expanded backstop was criticized by Republican lawmakers who have long pushed for the government to reduce the size of the two companies.

"Why should we reward Fannie Mae and Freddie Mac with $200 billion in taxpayer dollars without first reforming these housing entities that were at the heart of the economic meltdown?" House Minority Leader John A. Boehner (R-Ohio) said in a statement.

That debate remains in the offing, but the financial crisis has only increased the importance of the companies' health. As other sources of financing disappeared, Fannie and Freddie bought or agreed to buy about three-quarters of all new mortgage loans last year.

Now the companies also will play a central role in the Obama administration's plan. Officials described the effort as requiring sacrifices by private firms, but the greatest costs will be incurred by two in which the government owns an 80 percent stake.

Fannie and Freddie have been instructed to offer up to 5 million refinancings and to modify millions of additional mortgage loans. The plan is intended to benefit the companies in the long term by avoiding defaults on many of the loans, but only by reducing the amount they collect each month.

Staff writer Zachary Goldfarb contributed to this report.

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