Bonds News

UPDATE 1-US Treasury uncaps credit line for Fannie, Freddie

WASHINGTON, Dec 24 (Reuters) - The Obama administration pledged on Thursday to back beleaguered mortgage finance giants Fannie Mae FNM.N and Freddie Mac FRE.N no matter how big their losses may be in the next three years.

Treasury also said it would not require the two agencies to reduce their portfolio size next year, in a move that would allow them provide even greater support for the housing market as it begins to recover from its worst slump in decades.

The Treasury Department said it made the changes to assure markets it was fully behind both Fannie and Freddie and to give the agencies more time to reduce the size of the portfolios.

The two agencies each had a credit line of $200 billion. Combined, the two have thus far tapped about $111 billion.

Under the arrangement established under the previous administration, Treasury Secretary Timothy Geithner had until the end of this year to increase the limit without asking Congress for approval.

Treasury said it still hopes that Fannie and Freddie will reduce the size of their portfolios “in the future.” Under the newly announced rules, Fannie and Freddie will have to reduce their portfolio to $810 billion by the end of 2010 and annual increments of 10 percent thereafter.

The two agencies each hold portfolios in the high $700 billion range, officials said, meaning that they would not be forced to sell assets next year.

The 2010 reprieve was designed in part to avoid putting too much strain on the mortgage finance companies just as Treasury and the Federal Reserve were wrapping up their purchases of mortgage-related securities.

As part of Thursday’s announcement, Treasury said it was ending its mortgage-backed securities purchase program as of the end of 2009, and will have bought around $220 billion.

The Fed had previously said it would winding down its more than $1 trillion in mortgage asset buys in the spring of 2010.

The government’s hope is that private sector buyers will step in. By putting an unlimited guarantee behind Fannie and Freddie through 2012, the Obama administration hopes investors will feel more confident and will step up to fill the void left by the end of the Treasury and Fed buying programs.

Without healthy demand for mortgage-backed securities and the finance companies’ debt, mortgage interest rates would likely spike, sending a chill through the still-shaky housing market, which could derail the economic recovery. (Reporting by Corbett B. Daly and Emily Kaiser; editing by Leslie Adler)