New York state's Housing Finance Agency has said that for the first time, developers of multifamily apartment buildings were not taking up letters of credit (L/Cs) from troubled mortgage providers and backers, Fannie Mae and Freddie Mac.

Fears that the two US government agencies that own or guarantee nearly half of all the country's mortgages might run out of capital and fail are the latest focus in the credit crunched rooted in the downturn in the US housing market.

Break with tradition

Multifamily apartment developers usually obtain bank L/Cs to finance the construction phase of developments and at the same time obtain L/Cs from the two mortgage companies to assure all parties to a development are guaranteed payment so long as they meet commitments.

This break with their usual practice underlines the difficulties facing Fannie Mae and Freddie Mac, whose stock prices have sunk as the housing crisis has deepened.

The two mortgage companies are also said to be charging much higher rates for L/Cs.

Credit enhancements

Fannie Mae and Freddie Mac, along with a third US government agency, Ginnie Mae, issue the majority of mortgage-backed securities.

These often feature credit enhancements such as L/Cs or over-collateralisation designed to help protect investors from losses on underlying loans.

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