US Government Steps In As Lenders Face 'Collapse'

America's two biggest mortgage lenders are to receive near-unprecedented financial assistance from the US Treasury and central bank.

Henry Paulson, the treasury secretary, said that he would be looking for authority from Congress to advance unlimited amounts of money to the firms, Freddie Mac and Fannie Mae. This new legislation is likely to be in place by the end of this week.

The two firms have been the subject of rumours over recent days, with some Wall Street analysts speculating that they were struggling to balance their books due to the ongoing credit crunch. Any collapse in confidence in Fannie Mae and Freddie Mac is potentially disastrous, as the lenders collectively hold around £2.5 trillion of mortgage debt - or, around 50 per cent of the entire national market.

Effectively, this means that the fall of either firm would have a catastrophic effect on the housing sector, and would plunge the US economy into a deep and long-lasting recession. With America's GDP more than twice that of the world's second-largest economy, such an event could also have dire global ramifications.

Both lenders were set up by the government with public money, Fannie Mae in the 1930s and Freddie Mac in the 1970s, in a bid to improve home loans access among the American public as a whole. However, both have since passed into private hands as overall levels prosperity increased. The government's new intervention in Fannie Mae and Freddie Mac is likely to be for a limited time, until the worst effects of the credit crunch pass.

Speaking in Washington DC, Mr Paulson said: "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-owner companies." The treasury secretary also indicated that the government would empower itself to buy as much stock in Fannie Mae and Freddie Mac as it deemed necessary, when the new legislation passes.