FNM & FRE 9/5/08 - Fannie Mae ( FNM ) & Freddie Mac ( FRE ) Breaking out Afterhours

Fannie Mae ( FNM ) and Freddie Mac ( FRE ) are breaking out in afterhours tonight Friday 9/05/08. The stock market futures are surging on this news as well!

NEW YORK (Dow Jones)--The U.S. Treasury, while remaining tightlipped around details on its plans for Freddie Mac (FRE) and Fannie Mae (FNM), is quietly working behind the scenes to lend a helping hand to the struggling mortgage finance giants.

In recent weeks, Treasury officials have been reaching out to overseas buyers - including foreign central banks - of so-called agency securities, or debt sold by the two companies, to reassure them of the creditworthiness of these borrowings.

In one such conversation, at the end of August, the Treasury sought to reassure the Bank of Mexico, according to a person familiar with the matter, of the soundness of agency securities held by the bank. The discussion with the Treasury took place as Mexico's central bank, an investor in agency debt, met with Freddie officials to address concerns it had about these investments.

Treasury officials have also had similar conversations with Japanese investors who are buyers and holders of agency debt.

The moves are an effort to quell concerns of investors amid uncertainty around the fate of Freddie and Fannie. They are also aimed at bolstering demand for this type of financing by the two companies that is critical to their business. Many analysts and investors say that a government bailout is inevitable if Freddie and Fannie, which were chartered by the Congress to fuel home ownership, are unable to tap the debt market for funding.

The backdoor workings of the Treasury offer a window into how critical Freddie's and Fannie's access to the debt market is to their functioning. The two government-sponsored enterprises use the funds to finance their purchases of home loans from mortgage lenders.

"We are making progress on our work" with the companies' regulator and government officials, said Treasury spokeswoman Jennifer Zuccarelli.

For the Treasury, the ability of the pair to keep turning over their debt is paramount. Last month, Congress gave the Treasury Department the authority to lend money to the firms or take an equity stake. While Treasury officials have reiterated that they have no imminent plans to intervene, a deterioration in the housing sector could force their hand if either company can no longer fund itself.

It is widely expected that such an intervention will likely render worthless the holdings of existing shareholders. The government is expected to protect holders of the companies' senior debt and the mortgage-backed securities they guarantee to avoid a meltdown in financial markets.