On July 13, the Board of Governors of the Federal Reserve System (Federal Reserve) announced that it has granted the Federal Reserve Bank of New York the authority to lend to Fannie Mae and Freddie Mac, should the need arise.

The Federal Reserve explained that the “authorization is intended to supplement the Treasury’s existing lending authority and to help ensure the ability of Fannie Mae and Freddie Mac to promote the availability of home mortgage credit during a period of stress in financial markets.” Any lending to the two companies would be at the primary credit rate (currently 2.25%) and would be backed by U.S. government and federal agency securities.

Furthermore, Treasury Secretary Paulson announced at the same time that the Treasury is seeking approval to temporarily increase its line of credit to Fannie Mae and Freddie Mac and to purchase equity stakes in either of the companies if needed. In his statement, Paulson remarked that “Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies.” He believes that “[t]heir support for the housing market is particularly important as we work through the current housing correction.”

Fannie Mae and Freddie Mac hold or back $5.3 trillion in mortgage debt, which accounts for approximately half the outstanding mortgages in the United States.