Less than 48 hours after federal regulators seized IndyMac Bank, the Board of Governors of the United States’ Federal Reserve System announced today that it has granted the Federal Reserve Bank of New York the authority to lend to Fannie Mae and Freddie Mac should such lending prove necessary.

Any lending would be at the primary credit rate and collateralized by U.S. government and federal agency securities. This authorization is, according to the Fed, intended to supplement the Treasury Department’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.

For the uninitiated, Freddie Mac is a stockholder-owned corporation established by the United States Congress in 1970 to provide liquidity, stability and affordability to the nation’s residential mortgage markets. Freddie Mac raises capital on Wall Street and throughout the world’s capital markets to finance mortgages for homeowners across U.S. Over the years, it has been estimated that Freddie Mac has made homeownership possible for one in six homebuyers.

For his part, Freddie Mac chairman and CEO Richard Syron, had this to say about today’s development:

We are heartened by today’s announcement and the steps outlined by the U.S. Department of the Treasury and the Federal Reserve Board. This affirmation of the important role of the GSEs, and that we should continue to operate as shareholder-owned companies, should go a long way toward reassuring world markets that Freddie Mac and Fannie Mae will continue to support America’s homebuyers and renters. I applaud Secretary Paulson and Chairman Bernanke for their leadership and encourage Congress to act quickly to pass the new legislative proposals.

Freddie Mac and the Office of Federal Housing Enterprise Oversight (OFHEO) say the company is adequately capitalized, has a large liquidity portfolio and access to the world’s debt markets. The company is in the process of finalizing its June 30, 2008 financial results and says they will show that Freddie Mac has a substantial capital cushion above the 20% mandatory target surplus established by federal regulations.

Speaking on behalf of the United States government, the Secretary of the U.S. Department of the Treasury, Henry 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-owned companies. Their support for the housing market is particularly important as we work through the current housing correction.

Below, when Paulson refers to “GSEs” he’s talking about government sponsored enterprises, which are a group of financial services corporations created by the United States Congress. Their function is to enhance the flow of credit to targeted sectors of the economy and to make those segments of the capital market more efficient and transparent.

GSE debt is held by financial institutions around the world. Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets. Therefore we must take steps to address the current situation as we move to a stronger regulatory structure.

In recent days, I have consulted with the Federal Reserve, OFHEO, the SEC, Congressional leaders of both parties and with the two companies to develop a three-part plan for immediate action. The President has asked me to work with Congress to act on this plan immediately.

First, as a liquidity backstop, the plan includes a temporary increase in the line of credit the GSEs have with Treasury. Treasury would determine the terms and conditions for accessing the line of credit and the amount to be drawn.

Second, to ensure the GSEs have access to sufficient capital to continue to serve their mission, the plan includes temporary authority for Treasury to purchase equity in either of the two GSEs if needed.

Use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer.

Third, to protect the financial system from systemic risk going forward, the plan strengthens the GSE regulatory reform legislation currently moving through Congress by giving the Federal Reserve a consultative role in the new GSE regulator’s process for setting capital requirements and other prudential standards.

I look forward to working closely with the Congressional leaders to enact this legislation as soon as possible, as one complete package.