'Prudent steps will help US mortgage giants'

Democratic White House hopeful Barack Obama said he was confident "prudent steps" by the US Government would stabilise mortgage giants Fannie Mae and Freddie Mac but it was necessary to see how it played before deciding on what steps to take.

In his first comments on the situation, Obama said he was monitoring the situation of the two institutions closely and it was of "extraordinary concern".

"We have to understand that those two institutions play a critical role in making sure American homeowners can buy a home," the Illinois senator said.

"And I have confidence that with some prudent steps by the government, that we'll be able to stabilise the situation."

Obama said he was committed to ensuring liquidity in the housing market.

Obama was cautious when asked whether he would favour a bailout of the two institutions, whose shares tumbled last week on concerns about their capital due to the mortgage crisis.

"There are a lot of different definitions of what a bailout would look like," he said. "There are issues related to the short term liquidity, when they borrow money, versus issues related to whether the underlying assets of the two corporations are really unsound.

"I think we need to watch carefully and see how it plays out before we make a decision about which steps need to be taken, if any," he said.

Asked about the impact of market rumours on the share price, when some say the two have plenty of liquidity, Obama said the bigger problem was the underlying housing market.

"Part of the problem is that although the mortgages they hold are sound, housing valuations are going down, and that changes their balance of capital to debt," Obama said.

"It's not that the underlying assets have proven to be non-performing assets, this isn't like holding a bunch of sub-prime loans but it does raise concerns."

Obama said he welcomed the passage of a housing bill by the Senate last week and he hoped US President George W Bush would sign it. "What we have to do is find bottom in the housing market so that over time the banks can write off their bad debt and we can start moving back into a more normal housing situation," he said.

Obama said the housing bill was one of several steps needed quickly for the economy, including an economic stimulus package.

"I have little doubt we've moved into recession at this point," he said.