Troubled US mortgage lenders face key test Monday

By Glenn Somerville and Alister Bull

WASHINGTON, July 13 (Reuters) - A planned sale of securities on Monday by Freddie Mac (FRE.N) is shaping up as a key test of investors' faith in stressed mortgage finance sources Freddie Mac and Fannie Mae (FNM.N) amid growing concern as to whether an official rescue may yet be needed for them.

The Wall Street Journal reported that Treasury Secretary Henry Paulson was expected to make a statement later on Sunday expressing support for the beleaguered mortgage lending companies.

Treasury during the weekend was checking banks and other institutions which typically buy the type of short-term securities Freddie Mac will sell, assessing their appetite for them after the two companies' stock was battered throughout the past week, according to the Washington Post.

If the sale goes badly and their stock prices -- now barely a fraction of what they were a year ago -- resume tumbling, then the Treasury and the Federal Reserve will nearly certainly be obliged to step in to help the government-sponsored but shareholder-owned mortgage financing enterprises.

They could add to the troubled lenders' capital by making loans available to them or through some sort of taxpayer-funded share purchases, though Paulson made clear he does not want to offer any full-fledged bailout that benefits shareholders.

Paulson said on Friday he wants Fannie Mae and Freddie Mac to continue "in their current form," a message to markets it is possible that Treasury may want to repeat before Freddie Mac's scheduled Monday sale of $3 billion of 3- and 6-month bills.

The battering that Fannie and Freddie have taken in financial markets is seen in the markets as a crisis of confidence in their future.

On Sunday the Securities and Exchange Commission stepped in to warn against rumor-mongering of any kind against any firm.

The SEC said it will conduct investigations to make sure that no false information was being spread but did not name any companies it felt might be victimized.

The two mortgage giants play a vital role in U.S. housing markets, which already are experiencing their deepest downturn since the Great Depression, and Treasury and the Fed are on the spot to make sure they do not put a sorely stressed financial system in worse shape than it is already in.

Fannie Mae and Freddie Mac buy mortgages from lenders and package them into guaranteed securities sold around the world, providing more funds to keep mortgage markets lubricated.

They either own or guarantee about half of the $12 trillion in U.S. home mortgages that are outstanding so any interruption in their smooth functioning would quickly further pinch the supply of mortgage money available. That would drive lending rates up when the economy already is at risk of a downturn.

A campaign by official policy makers to reassure investors about the two government-sponsored enterprises continued on Sunday, as the chairman of the U.S. Senate Banking Committee, Chris Dodd, said the lenders were "in good shape."

Dodd told CNN television investors should feel confident they were "very strong, viable entities ... The capital they have is good, it is in excess of what is required under federal law," adding: "This is not a time to be panicking".

On Friday, Dodd said he had been told in discussions he had with Fed Chairman Ben Bernanke and Paulson various options were under consideration, including opening access to the discount window, an emergency financing facility through which the Fed acts as a lender of last resort for the U.S. banking system. (Editing by James Dalgleish)