US Federal Reserve and US Treasury unveil a series of measures to prop up Fannie Mae and Freddie Mac as shares fall 40% last week

The United States Federal Reserve and US Treasury have unveiled a series of measures to prop up slumping mortgage giants Fannie Mae and Freddie Mac.

Money

Shares in both government sponsored enterprises owned by shareholders plummeted more than 40% last week on fears the companies, lynchpins of the American housing market, were under capitalised.

There was concern that problems at the lenders could spark a fresh wave of falls in the global financial markets.

US Treasury secretary Hank Paulson said yesterday US authorities would provide additional liquidity to the troubled mortgage groups and pledged to buy stakes in the pair if their current market situation deteriorated further.

Meanwhile, the Federal Reserve announced it has granted the Federal Reserve Bank of New York the authority to lend to the two firms.

In early morning European trading shares in Fannie and Freddie jumped 16 and 22% respectively in Frankfurt.

The sharp fall in share prices last week was precipitated by losses from their mortgage holdings and threatened the financial survival of both entities

Fannie and Freddie own or guarantee around $5 trillion of debt, close to half the value of all America's mortgages.

A failure of Freddie and Fannie would mean a principal source of financing would be taken out of the market leading to a sharp increase in mortgage payments as well fears for the survival of other lenders.

The companies buy mortgages from banks and other lenders and package them into bonds, which are then sold onto other investment firms, including pension funds.

Banks use the money from selling their mortgages to Fannie and Freddie to make fresh loans to new homeowners.

The two firms guarantee payments on mortgage bonds they create.

Washington's intervention, after an earlier insistence that it would not get involved, came after the collapse last week of mortgage lender IndyMac Bancorp, following a run on the bank, in which customers withdrew more than $1.3bn of deposits over 11 business days.

Foreign central banks, mostly in Asia, hold $979bn of the bonds and mortgage backed bonds sold by Fannie and Freddie.