Fannie, Freddie say they have plenty of capital

By Mark Felsenthal and Alister Bull

WASHINGTON (Reuters) - Fannie Mae and Freddie Mac said on Friday that their finances were sufficiently sound to withstand the housing crisis as government officials scrambled to restore confidence in the country's two largest mortgage finance companies.

U.S. Treasury Secretary Henry Paulson indicated that a bailout of Fannie and Freddie was unlikely despite financial market concerns that the agencies, which finance nearly half of U.S. homes, may have trouble raising enough money to keep buying mortgages.

A key senator said the U.S. Federal Reserve was considering allowing Fannie and Freddie to borrow directly from the central bank, spurring speculation that the Fed may take action as early as this weekend. Fannie and Freddie shares, after taking a beating, recovered some of their earlier losses but ending lower on the day.

Sen. Christopher Dodd, the Connecticut Democrat who chairs the Senate Banking Committee, said he spoke with Fed Chairman Ben Bernanke and Paulson. Dodd said they were looking at various options, including opening access to the discount window, through which the Fed acts as a lender of last resort for the U.S. banking system.

Investors were worried that the mortgage agencies might run short of capital, placing the fragile U.S. economy at even greater risk and deepening the housing slump. Dodd sought to reassure investors about the health of the two companies.

"These institutions are fundamentally sound and strong," Dodd said at a news conference. "There is no reason for the kind of (stock market) reaction we're getting."

Concerns about Fannie and Freddie were stoked by a report in The New York Times on Friday saying the administration was considering a plan to put the companies -- thought to have implicit government backing -- into a conservatorship if their problems worsened, citing sources briefed about the plan.

In a conservatorship, regulators appoint a person or entity to run a troubled financial institution until it can be stabilized.

Freddie Mac said in a statement it had options to manage capital, such as cutting its dividend, and was not on the threshold of conservatorship. Fannie said it had access to "ample sources of liquidity," noting that it had issued more than $24 billion in debt this week.

NO BAILOUT

Were Fannie and Freddie unable to borrow or find it too costly, they would not be able to buy mortgages from lenders. This would make it far more difficult, and perhaps impossible, for people to obtain home loans, which could cause the housing market to grind to a halt. Borrowing from the Fed would give the agencies quick access to inexpensive funds.

Fed spokeswoman Michelle Smith said the central bank was monitoring the situation closely, but had had no discussion with Fannie or Freddie about accessing the discount window.

Paulson earlier said the primary focus was supporting Fannie and Freddie "in their current form as they carry out their important mission."

The reference to keeping Fannie and Freddie in their current form was a signal the government was not on the verge of nationalizing them, and that it wanted to see them survive as congressionally chartered but privately-held companies, a source familiar with the administration's thinking said.

Separately, the Senate passed a housing bill on Friday that included regulatory reform of agencies including Fannie and Freddie, known as government-sponsored enterprises or GSEs. It now moves to the House of Representatives, which has approved a similar measure. The White House has threatened a veto.