The Federal Reserve?s plan to shore up embattled mortgage giants Freddie Mac and Fannie Mae is the right move but could have happened years ago, local experts said.
“The whole business with Fannie and Freddie ? that whole thing has been in front of Congress for years,” said Robert Wasilewski, portfolio manager with Baltimore-Washington Financial Advisors.
The Fed on Sunday said it would allow the Federal Bank of New York to lend to the two companies if necessary at an interest rate of 2.25 percent.
Also, Secretary Henry Paulson said the Treasury Department is pushing Congress to expand its current line of credit to Freddie and Fannie and make an equity investment in the companies if needed.
Freddie Mac and Fannie Mae hold or back about $5.3 trillion in mortgage debt, about half the outstanding total in the United States.
The importance of the shareholder-owned companies to the U.S. housing system has led economists to believe they always had an implicit guarantee of help from the federal government.
The Fed and Treasury actions make that guarantee explicit, something University of Maryland finance professor Peter Morici said shouldn?t come as a big surprise.
” ?Bailout? is a pretty loaded word,” Morici said. “The Fed loans money to banks when they get into trouble ? so what?s the difference? Banks got into bad deals, were dishonest to investors ? Freddie and Fannie did none of that. Why shouldn?t they get at least as much help?”
The plan had an initial effect on the companies? stock values, but investors? enthusiasm waned by midday trading Monday. Freddie Mac closed Monday down 8.26 percent to $7.11, and Fannie Mae shares fell 5.07 percent to close at $9.73.
Morici said inaction wasn?t an option for federal regulators, who were forced to help out two of the linchpins of the national economy.
“If you let them fail, what happens to the U.S. economy,” he said. “It would create such a downdraft in the U.S. economy, it?s hard to believe anything would viable. It?s like having a post office ? you have to have it.”
The Associated Press contributed to this story.
