Key US Mortgage Lenders in Shares Meltdown

Shares of US mortgage finance giants Fannie Mae and Freddie Mac were in a freefall Friday on heightened concerns the trillion-dollar firms may face insolvency or a government takeover.

Freddie Mac plunged 47 percent to 4.23 dollars at 1450 GMT following a 22 percent slide on Thursday and Fannie Mae lost 44 percent to 7.40 dollars after a 14 percent drop in the prior session.

The shares of the two firms have lost around 80 percent since the start of the year.

The latest action came amid a new report saying the government could put the finance giants in receivership, which would make their shares worthless.

The New York Times said the administration of President George W. Bush is weighing the possibility of having to place one or both companies in a conservatorship to protect them from the snowballing collapse of the US mortgage finance market.

The Wall Street Journal, which first reported Thursday that the Bush administration was weighing strategies to keep the firms afloat, said Friday that pressure was on them now to raise fresh capital.

Treasury Secretary Henry Paulson, in a brief statement, offered no indication of any imminent intervention.

“Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission,” Paulson said.

“We are maintaining a dialogue with regulators and with the companies.”

Under a 1992 law, if either is seen as being severely undercapitalized, it may be placed into government conservatorship.

One research note this week said the two firms may have to raise tens of billions of dollars in fresh capital under new accounting rules to offset massive losses in their home loan portfolios.

The two firms, which have no explicit government backing despite their government charter, provide liquidity to the housing market by buying mortgages and repackaging them into securities sold to investors. But the horrific housing slump has led to billions of dollars in losses for the firms.

Freddie Mac has a loan portfolio of 1.5 trillion dollars and Fannie Mae’s is over 700 billion. Together they own or guarantee some 5.2 trillion dollars in loans, or about 40 percent of the total value of home loans in the United States.

The prospect of insolvency for the so-called government-sponsored entities or GSEs could send more shockwaves through the global financial system because of the size of the companies, and the notion of a bailout has prompted heated debate.

“The markets are concerned that these GSEs would default on their five trillion dollars of debt,” said Andrew Busch at BMO Capital Markets.

“In case you’re counting, this would effectively double the size of the outstanding US federal government debt — a feat of unprecedented achievement.”

“The general sense is that we may have entered a new phase of the credit crunch,” said analyst Kevin Giddis at Morgan Keegan.

“There is a legitimate concern that the beleaguered banking sector may be in store for yet another wave of capital raising if the stresses afflicting the GSEs deepen, since GSE-related securities are widely held in banks’ portfolios.”

FreedomWorks, a conservative think tank, urges lawmakers to reject a bailout and to remind investors that there is no government guarantee for the companies.

“Investors holding agency paper already receive a significant risk premium over Treasuries,” said the group’s president Matt Kibbe.

“The prospectus for every GSE bond clearly states that it is not backed by the government. Taxpayers should not and will not bail out Freddie Mac and Fannie Mae from their poor lending decisions, lack of adequate reserves, and past accounting corruption.”

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